Pennsylvania conduit borrowers aren’t subject to prevailing wage rules

Private borrowers that issue tax-exempt bonds through Pennsylvania conduit issuers don’t need to follow the state’s prevailing wage requirements for public projects.

That’s the final word from the Pennsylvania Supreme Court, which in February decided a case that was filed in 2018 over bonds issued in 2016.

Ursinus College issued bonds through a public authority for a construction project in 2016, began construction in 2017, and was sued for not following prevailing wage requirements in 2018 — the same year it finished the project. 

The Ursinus issuance that sparked the case was a fairly typical bond financing for a nonprofit, according to William Rhodes, a partner at Ballard Spahr. 

Rhodes and Ballard Spahr attorney Skye Nickalls published a legal alert about the ruling in February.

In 2016, Ursinus needed approximately $23 million for a new building. The college partnered with the Montgomery County Higher Education and Health Authority to serve as the conduit issuer that issued tax-exempt bonds on behalf of the school.

In early 2018, the construction on the project — the Innovation and Discovery Center — was mostly finished, when the International Brotherhood of Electrical Workers, Local 98 requested an opinion from the Pennsylvania Bureau of Labor Law Compliance about whether the project was violating Pennsylvania’s Prevailing Wage Act. 

Pennsylvania’s prevailing wage policies, like the federal act upon which it was based, mandate that workers be paid a certain wage if they’re working on projects paid for by the funds of a public body. Publicly funded projects have lots of different requirements, Rhodes said.

“The purchase of certain equipment, like steel; separate bidding on different components of the project; and prevailing wage,” Rhodes said. “There’s a host of these rules that come along when public monies are being spent on a project. But there were no public monies involved here.”

Conduit bond financings are a common means for private nonprofits like Ursinus to borrow, gaining the benefit of the tax-exemption on interest, which allows them to pay lower interest rates. The governments that issue conduit financings like the Ursinus deal aren’t responsible for the debt and don’t participate in the flow of funds used to repay it.  

 Ursinus’s brief for the state Supreme Court case cited several other states where courts ruled that municipal bond issuances on behalf of private entities did not count as public funds, including Kentucky, Tennessee and New York. 

The Bureau of Labor Law Compliance ruled that Ursinus’s bond proceeds counted as private monies, so IBEW appealed to the Prevailing Wage Appeals Board. 

The Appeals Board sided with the union and ordered Ursinus to retroactively pay the prevailing wage to all the workers who had worked on the project.

The Appeals Board’s decision “set off alarm bells for many of us,” Rhodes said. Bybel Rutledge LLP Partner Catherine E. Walters, who represented Ursinus in the case, called the decision “very surprising.”

The board essentially “held that, but for the authority’s involvement, Ursinus could not have had the project occur,” Walters said, “and as a result, the public entity’s mere involvement in the project made the funds ‘funds of a public body.'”

The Appeals Board’s decision caused uncertainty across the commonwealth for nonprofits that wanted to issue bonds through conduit issuers, suddenly worried that their labor costs might increase by up to 30%, Walters said.

“I can’t tell you the number of calls I got from different bond counsels across the state who were aware of this project, who called to ask me, ‘had anything changed?’ and telling me that they were going to play it safe, and their clients were going to use traditional bank financing,” Walters said. 

 When Ursinus appealed the ruling to the Commonwealth Court, it was joined by four amicus parties that would have been affected by the new definition of “public monies,” including a coalition of colleges and universities, several groups promoting economic development, construction agencies, and other nonprofit organizations that rely on conduit bond issuers. 

In the appeal, Walters argued that the funds from the issuance never touched public coffers and that the public had no liability for the bonds. She rejected the argument that the issuance could not have happened without the municipality’s involvement, noting that Ursinus could have used other methods of financing. 

The Commonwealth Court agreed with Ursinus’s arguments, and after IBEW appealed to the state Supreme Court, the case was finally put to rest. 

 ”Neither [the bond proceeds] nor the debt service payments made by Ursinus ever entered, rested in, or otherwise flowed through the Authority’s coffers,” the court wrote in the ruling.

 The Supreme Court’s ruling will not change any policies, Walters noted, but rather protects the status quo.

Had the court sided with the IBEW, Waters said, it would have “brought havoc on private nonprofit projects.” 

Walters said the uncertainty that proliferated while the case worked its way to the Supreme Court motivated several nonprofits to finance their projects outside of Pennsylvania, with some opting to use the National Finance Authority instead.

The ruling comes at a time when Pennsylvania is working hard to become appealing to businesses, Walters noted — the Pennsylvania Chamber of Business and Industry wrote an amicus brief for the case and celebrated the ruling.

Rhodes noted that the two final rulings were unanimous, an increasingly rare occurrence in Pennsylvania courts.

 ”I think that sanity was restored by the Commonwealth Court and the Pennsylvania Supreme Court,” Rhodes said. “That’s very comforting for many authorities, municipal authorities, industrial development authorities, etc., that serve in a conduit issuer role.”