Supreme Court of Pennsylvania Boosts Tax-exempt Bond Financing and Economic Development in the Commonwealth
On Feb. 21, the Supreme Court of Pennsylvania issued its long-awaited tax-exempt bond financing decision, Ursinus College v. Prevailing Wage Appeals Board (No. 18 MAP 2023). Its opinion is a major victory for Pennsylvania authorities and the tax-exempt bonds they offer. The court’s ruling will — without a doubt — help foster Pennsylvania’s economic growth.
The case began with Ursinus College, a private, nonprofit higher education institution in Collegeville, PA. It wanted to build an Innovation & Discovery Center and Welcome Center. The project’s price tag was $23 million.
To pay for its project, the College chose tax-exempt bonds to be issued by the Montgomery County Higher Education and Health Authority. This entity was created by Montgomery County under Pennsylvania’s Municipality Authorities Act. Authorities formed under the Act have the power to acquire, construct, improve, maintain and operate various projects. They also are permitted to borrow money and issue bonds to finance projects for colleges, universities, hospitals and health care facilities.
The Authority’s participation did not mean that the project was paid for with taxpayer or other public money, however. All the project’s funding was private. A private trustee received the bond proceeds from the buyers. The trustee held all project funds in a private account. And it paid for the project’s construction costs at the College’s exclusive direction.
The Authority, on the other hand, never touched the project’s funds. It had no right to direct how that money was used. The project also did not implicate public money; the bonds declared on their face that the Authority had no taxing power, it was not pledging its credit and the bonds were not government obligations. The financing documents made clear that the College had all payment responsibilities. The Authority was merely a financing intermediary, or conduit.
Despite all this, a representative for project workers filed a grievance, claiming workers had to be paid under the requirements of the Pennsylvania Prevailing Wage Act. That law requires the payment of prevailing wages for projects funded with public money. Its application generally means increased project costs. Here, the College had not budgeted for those extra costs, as it did not think the Act applied because no public money was involved.
In a surprise, the Prevailing Wage Appeals Board ruled that the Prevailing Wage Act applied to the Ursinus College project. Even worse, the Board adopted a new “but for” test that required the Act’s application whenever an authority is involved in project financing.
The Board’s “but for” test created widespread alarm across the public finance community. It imperiled the efficacy of authority-issued bonds. The Pennsylvania General Assembly authorized the creation of these authorities and gave them the power to issue tax-exempt bonds. Application of prevailing wages to all of these bonds undermines and negates their tax benefits.
After the Board adopted its new “but for” test, project owners started to consider other financing methods for their projects. Some borrowers financed their projects with bonds from out-of-state authorities. Fears grew that developers might seek to undertake their projects in other states with more hospitable financing environments. The Board’s new test had created an existential threat to Pennsylvania authorities and the bonds they offer.
The College immediately challenged the Board’s ruling in the Commonwealth Court. The court unanimously reversed, but its reprieve was only temporary, as the Supreme Court of Pennsylvania then agreed to hear the case. The workers’ representative urged Pennsylvania’s highest court to reinstate the Board’s “but for” test and adopt it as a final statement of controlling Pennsylvania law.
Authorities were finally able to breathe a sigh of relief on Feb. 21. That day, the Supreme Court unanimously and definitively rejected the “but for” test that represented such a threat to the vitality of authorities and their bonds. The court unanimously held that the Prevailing Wage Act did not apply to the Ursinus College project. The court explained that the Act’s plain language requires payment of project costs using public money. That simply did not happen here. No public money was used to pay Ursinus project costs. And the Montgomery County Authority had no responsibility for any project-related payments.
In the end, every one of the 11 judges who considered the “but for” test turned it down. These jurists resoundingly rejected a gambit that threatened devastating consequences for Pennsylvania authorities. The courts’ decisions will preserve future growth and development in the Commonwealth.
Karl Myers, Co-Chair of Stevens & Lee’s Appellate Practice Group, authored amicus curiae (“friend of the court”) briefs on behalf of the Pennsylvania Economic Development Association and its member authorities in both the Commonwealth Court and Supreme Court. The analysis in the courts’ opinions tracks the arguments found in those amicus briefs.
For more information on the Ursinus case, please contact Karl at karl.myers@stevenslee.com or 215.751.2864. For more information on tax-exempt finance, please contact Ramiro Carbonell at ramiro.carbonell@stevenslee.com or 717.399.6636, Peter Edelman at peter.edelman@stevenslee.com or 610.478.2168, Brian Koscelansky at brian.koscelansky@stevenslee.com or 570.969.5364, or Blake Marles at blake.marles@stevenslee.com or 610.997.5060. Alternatively, please contact the Stevens & Lee attorney with whom you regularly work.
