Where a public body essentially acts as a pass-through of funds used on a construction project, the “economic reality” of the transaction is that the work is not “public work” under the Pennsylvania Prevailing Wage Act. In Ursinus College v. Prevailing Wage Appeals Bd., Ursinus challenged a Pennsylvania Prevailing Wage Appeals Board’s decision that a construction project undertaken by the college was “public work” under Section 2(5) of the Act because it was “paid for in whole or in part out of the funds of a public body.” The public body in this case was the Montgomery County Higher Education and Health Authority. In short, the Act defines “public work” as:
[C]onstruction . . . work, other than maintenance work, done under contract and paid for in whole or in part out of the funds of a public body where the estimated cost of the total project is in excess of twenty-five thousand dollars ($25,000), but shall not include work performed under a rehabilitation or manpower training program.
As noted by the Commonwealth Court, the Pennsylvania Supreme Court summarized the four-prong test under Section 2(5) in Pa. Nat’l Mut. Cas. Ins. Co. v. Dep’t of Labor and Indus., Prevailing Wage Appeals Bd., 552 Pa. 385, 715 A.2d 1068 (1998) as:
(1) there must be certain work;
(2) such work must be under contract;
(3) such work must be paid for in whole or in part with public funds; and
(4) the estimated total cost of the project must exceed $25,000.
The Commonwealth Court also looked at the “economic reality” of the transaction between the various involved parties and concluded that the project was not paid for “out of the funds” of a public body.
Briefly stated, Ursinus pursued certain construction projects and borrowed up to $23 million to pay for a portion of it. The Authority and Ursinus entered into a loan agreement. Attached to the loan agreement as exhibits were a trust indenture between The Bank of New York Mellon Trust Company, N.A. and the Authority, as well as a bond purchase agreement between the Underwriter and Ursinus. The Authority sold the bonds to the Underwriter; Ursinus paid for this transaction. The Trustee then deposited the bond proceeds into a project fund from which the Trustee disbursed project costs to Ursinus. Next, Ursinus paid debt service on the loan to the Trustee. After that, the Trustee deposited Ursinus’ payments into a bond fund held by the Trustee and paid the bondholders directly from the bond fund.
Looking at the “economic reality” of the entire transaction, the Commonwealth Court agreed with the Board that the Authority issued the bonds and loaned the funds to Ursinus. However, the Court noted the transaction did not stop there. The Authority was obligated to transfer the funds to the Trustee before Ursinus received any funds for the project, and the Authority did not hold these funds. The funds Ursinus used to pay for the project were disbursed by the Trustee, not the Authority. Based on that structure, the Commonwealth Court held that the project was not paid “out of the funds” of the Authority, therefore it was not “public work” subject to the prevailing wage rates. The Court rejected the Board’s reasoning that Ursinus would not have had the funding stream available but for the existence of the Authority, as Section 2(5) of the Act does not contain a “but for” test.
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