No Prevailing Wage Requirements for Pennsylvania Conduit Issuers

The Pennsylvania Supreme Court issued a decision on February 21, 2024, holding that the Commonwealth’s Prevailing Wage Act (PWA), which requires workers on a construction project paid for with funds of a public body to be paid prevailing minimum wages, does not apply to privately-owned, bond-financed capital projects where a public authority is acting as a conduit issuer and bonds are not secured by or payable from public moneys. The decision affirmed the Commonwealth Court and overturned a 2021 decision by the Pennsylvania Prevailing Wage Appeals Board (Appeals Board) that has caused confusion and created uncertainty in the municipal bond market.

The case began in 2016, when Ursinus College (Ursinus), a private, nonprofit liberal arts college in Collegeville, Pennsylvania, requested that the Montgomery County Higher Education and Health Authority (MCHEHA), a municipal authority formed by the Board of County Commissioners of Montgomery County, issue bonds on its behalf in order to fund a construction project on its campus. As a nonprofit organization organized under Section 501(c)(3) of the Internal Revenue Code, Ursinus is eligible for lower-cost tax-exempt financing for capital projects if a public authority issues tax-exempt bonds and lends the proceeds of the sale to the borrower college and the borrower college is solely responsible for the repayment of all debt service on the bonds. Under such a structure, the public authority serves merely as a conduit for the borrower college. Neither the Commonwealth nor any political subdivision of the Commonwealth has any liability to repay the bonds and MCHEHA assigns all rights to loan repayments from the Borrower to the trustee for the bondholders. At no time are any governmental taxes, fees or other public moneys pledged to repay the bonds, which are marketed and sold based solely on the credit of the borrower college.

In 2018, after MCHEHA issued bonds on behalf of Ursinus and the college used the proceeds to begin a major construction project, the International Brotherhood of Electrical Workers, Local No. 98 (IBEW) requested an opinion from the Department of Labor and Industry’s Bureau of Labor Law Compliance (Bureau) as to whether the PWA applied to the construction project funded with the proceeds of MCHEHA’s bonds. When the Bureau issued its opinion that the project did not constitute a “public work” under the PWA, IBEW appealed, and the Appeals Board found that the PWA did apply, observing that MCHEHA was a public body and the financing for the project could not have occurred without MCHEHA. The Commonwealth Court then overruled the Appeals Board and IBEW appealed that decision to the Pennsylvania Supreme Court.

The structure of the financing was instrumental to the Pennsylvania Supreme Court’s finding that the project was not dependent on public funds, including that all funds flowed in both directions directly between the bond trustee and Ursinus—MCHEHA never held or disbursed any of the bond proceeds, and did not receive or make any of the debt service payments. The Pennsylvania Supreme Court also noted that MCHEHA never bore any risk or liability with respect to repayment of the bonds.

The Appeals Board’s 2021 decision had prompted a lot of discussion in Pennsylvania’s municipal bond community, as authorities reconsidered their policies for capital projects, and some borrowers considered using out-of-state issuers to avoid voluntarily subjecting themselves to prevailing wage and other state regulations. While MCHEHA did not take a position on the matter before the Pennsylvania Supreme Court, the Pennsylvania Economic Development Association, several Pennsylvania colleges, various organizations representing business interests, and the Pennsylvania Municipal Authorities Association all filed amici curiae briefs with the Court in support of Ursinus’s position. The Pennsylvania Supreme Court’s decision this week brings some needed clarity for Pennsylvania’s colleges, private schools, health care systems, and cultural institutions, as well as the public authorities through whom they access the municipal bond market.

Companies interested in learning more about undertaking a bond financing should reach out to Ballard Spahr’s Public Finance Group, which has extensive experience representing state and local governments and authorities, nonprofit organizations, investment banks, and banking institutions in virtually every type of bond transaction.

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