It happens outside government too. It happens anytime your higher-level boss tells you: "Yes, I'm on board! You're right, a system like that would help us tremendously in several ways! Please estimate the costs for it so I can get us the money in our budget meeting next month." Happens all the time in enterprise businesses and the newer methodologies are extremely difficult to use in this sort of situation. In this case, I need some specs up front, create dev estimates, all to ultimately deliver a rough dollar amount or sometimes a "not to exceed" number for my boss...
Waterfall is only mostly dead. I'm told that the reason why the public sector prefers price-and-scope-up-front is that the alternative of "we'll keep delivering things as long as you keep paying us" sounds to them far too much like ways that they have been ripped off badly in the past when buying tanks, bridges, etc.
That is absolutely the reason. On top of that, the only reason they want to use iterations (along with the dreaded inchstone) is so they can use Microsoft Project as a progress bar. If you try to change your iteration deliverables (that were set three years ago) because of actual project issues, you get a ration of shit from the government and their advisors.