The Inflation Reduction Act, Public Law 117-168 (the “Act”), was signed into law by President Joe Biden on August 16, 2022, but the impact of some of its provisions is just beginning to be felt. Among those are the substantial federal subsidies the Act provides for state and local government investments in clean energy projects. These subsidies are provided through a change in the rules for clean energy tax credits, which will allow state and local governments to take a direct payment in lieu of the tax credit. While the amount of the direct payment for a qualifying project will vary, there is potential for some projects to qualify for a direct payment equal to 70% of the project cost.

Before the passage of the Act, clean energy tax credits could only be used to offset a credit recipient’s federal income tax liability. State and local governments were ineligible for credits, as they do not pay federal income tax, and therefore would be required to pay the full cost of any clean energy project. A common workaround was for the government to partner with a tax-paying business to obtain essentially a pass-through of the economic benefit of the tax credit.

With the passage of the Act, which applies to projects placed in service after December 31, 2022, a state or local government can directly receive the economic benefit of the credit. Eligible entities include states, their political subdivisions, and their agencies and instrumentalities, as well as public school districts.

An eligible entity must own the project for which it is seeking a direct payment. This may be a departure for governmental entities that have undertaken clean energy projects in the past. Prior to the passage of the Act, the tax-paying business partner, as the recipient of the tax credit, would own the project. Under this structure the governmental entity would be absolved of the liabilities of ownership of the project and the related installation and maintenance costs. Going forward, the governmental entity will have to assume these responsibilities as part of its ownership of the project in order to qualify for a direct payment.

While the Act authorizes a variety of clean energy tax credits, we anticipate that most governmentally-owned clean energy projects will seek to take advantage of the tax credits under Code section 45 (section 45Y after December 31, 2024), which provides for a production tax credit for electricity generated from renewables (the “Production Tax Credit”), or Code section 48 (section 48E after December 31, 2024), which provides for a clean energy investment tax credit (the “Investment Tax Credit”).

The Production Tax Credit is an annual tax credit based on the amount of electricity generated by a clean energy project. The credit is limited to ten years. In contrast, the Investment Tax Credit is taken completely up front and is received in a lump sum, based on the cost of the project.  Direct pay recipients must elect which of these credits to take; they may not take both. We believe the Investment Tax Credit will be the more popular of the two credits – particularly when considering the various direct-pay, tax advantaged bond programs and the impact that sequestration cuts had on them. Governmental entities that issued such bonds may be hesitant to assume that the value of the Production Tax Credit will not be cut by Congress in the future.

Clean energy projects eligible for direct pay credits include solar, geothermal, biogas, wind, and landfill gas facilities. After December 31, 2024, any project which is used for the generation of electricity and which has a greenhouse gas emissions rate of not greater than zero is eligible; the project need not fit within the parameters of a specified technology (wind, solar, etc.).

Direct pay recipients may finance these projects using tax-exempt bonds, so long as they otherwise qualify for tax-exempt status under Code sections 103 and 141-150. We anticipate that many projects will qualify to be financed with tax-exempt bonds due to the governmental ownership requirement. If tax-exempt bonds are used to finance the project, the amount of the direct pay credit generally will be reduced by 15%. Current market conditions suggest that the benefit of using tax-exempt bonds will outweigh the reduction in the direct pay credit.

There are a number of additional provisions in the Act that may impact the value of a direct pay credit under the Act. Most importantly, to obtain the minimum 30% Investment Tax Credit or 2.75 cents/kW Production Tax Credit, a project must either be small (generate less than 1 megawatt) or meet prevailing wage and apprenticeship requirements. Public entities in Pennsylvania will be familiar with the prevailing wage requirement, but may be unfamiliar with the apprenticeship requirement. A limited good faith exception to the apprenticeship requirement may apply.

The Act also has escalation provisions, which if activated will increase for the value of the direct pay credit over the minimum level. Bonuses are offered for projects using certain minimum levels of “domestic content,” as well as projects located in “energy communities” and “low-income communities.” These bonuses are stacking, such that a single project could potentially qualify and receive all of them.

A project will qualify for a “domestic content” bonus if it uses certain minimum amounts of domestically produced steel or iron, and manufactured products. If the minimum thresholds are met, a project receiving the Production Tax Credit will receive a 10% increase in the 2.75 cents/kW credit rate, and a project receiving the Investment Tax Credit will receive a 10 percentage point increase in the 30% credit rate.

A project will qualify for an “energy community” bonus if it is located in a brownfield site or near a coal mine or coal-fired power plant. Locating in a community with high concentrations of economic activity related to coal, oil or natural gas development and which currently has higher-than-average unemployment will also qualify the project for the “energy community” bonus. A qualifying project will receive a 10% bonus similar to the “domestic content” bonus discussed above.

A project will qualify for a “low-income community” bonus if it is located in a community that either has (1) a poverty rate equal to or greater than 20%, or (2) median family income not greater than 80% of the state’s income (or city income, if the community is located in a city). A qualifying project will receive a 10% bonus similar to the “domestic content” bonus discussed above. The bonus may even be doubled to 20% if the project is part of a qualifying affordable housing program. Allocations for the “low-income community” bonus are limited and require a special pre-application process and award.

Eligible entities that wish to apply for direct payment of clean energy credits must complete a special pre-filing registration application with the IRS to obtain a special registration number for each particular project. The pre-filing registration application web tool is now live, and eligible entities that intend to apply for direct payment are encouraged to complete that application as soon as possible.

As busy as the IRS has been over the last year with implementing the Act, many questions remain about the direct pay credit program. In particular, there are unresolved issues regarding the tax character of any direct payments received by the recipient when a project is financed with tax-exempt bonds. We anticipate that the IRS will issue guidance on this question this year. As projects get underway, we can anticipate additional questions and (hopefully) timely answers from the IRS.

Reprinted with permission from the February 6, 2024 edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

A bond issue (a debt obligation of a local government) is often perceived as a mystery for many Pennsylvania local government officials and solicitors. The securities and tax regulations governing municipal bonds have grown increasingly complex in recent years further adding to the challenge of understanding the path toward a successful bond issuance.

In this guide, McNees’ experienced bond counsel lawyers break down the fundamentals including the key players and steps involved to empower stakeholders to navigate this financial undertaking with confidence.

Read the full white paper here.

McNees’ Public Finance and Government Services team is available to provide comprehensive legal advice and answer questions on navigating Pennsylvania’s bond market. Our attorneys regularly serve as bond counsel for a wide range of clients including Pennsylvania counties, cities, boroughs, townships, school districts and authorities as well as for-profit and nonprofit organizations including healthcare and higher education institutions. We also represent borrowers, underwriters, banks, trust companies and other financial institutions in financings. McNees is listed in the “Municipal Bond Attorneys” section of the most recent edition of The Bond Buyer’s Municipal Marketplace.

Updates in the Inflation Reduction Act could provide tax credits as an avenue for funding opportunities for municipalities to make seemingly impossible project possible. McNees invites you to join our panel of industry experts led by attorney Ryan Gonder for a roundtable discussion on:

  • An overview of the recent changes in the Inflation Reduction Act
  • Eligibility and process for funding municipal projects
  • Examples/case studies of current projects in Pennsylvania

Register Here

Roundtable Guests:
Dr. Brian Regli
Office of the Governor, Commonwealth of Pennsylvania
Executive Director, Critical Investments  
Ryan Brockman
Raymond James
Vice President  
Jason Wert, P.E., BCEE
Market Leader – Water, Renewables and Energy Production
Kevin Sunday
McNees Wallace & Nurick
Policy Advisor  
Ryan Gonder, moderator
McNees Wallace & Nurick
Attorney, Public Finance and Government Services
Event Details:  
Date: Wed., January 17  
Time: Noon – 1:30 p.m.  
Location: This event is virtual. A link to join the webinar will be sent to registered attendees before the event.


The Pennsylvania Commonwealth Court recently issued a long-awaited opinion in a prevailing wage appeal brought by Ursinus College, captioned at Ursinus College v. Prevailing Wage Appeals Board, No. 828 C.D. 2021 (Pa. Commw. Ct. 2022). The College was appealing a decision by the Pennsylvania Prevailing Wage Appeals Board (the “Board”) finding that the Pennsylvania Prevailing Wage Act (the “Act”) applied to a construction project financed by the College (the “Project”), using municipal bonds issued by the Montgomery County Higher Education and Health Authority (the “Authority”). Read our prior commentary about the case here.

In an opinion and order issued August 4, 2022, the Commonwealth Court reversed the Board’s decision that the Act applied to the Project. In ruling for the College in its appeal, the court noted that the Project was financed through Bonds issued by the Authority for the benefit of the College. While the Authority issued the Bonds to finance the Project, it did not have any liability for repayment of the debt; the repayment obligation rested solely with the College. As explained in more detail in the amicus briefing, a typical bond transaction for a 501(c)(3) tax-exempt private educational organization, such as a college or university, consists of, among others, the following actors: a borrower, an underwriter, a trustee, and a conduit issuer. The structure used by the College to finance the Project followed this typical structure.

In its Opinion, the court held that the funding structure underpinning the Project did not give rise to a finding of “public work,” and as a result, the relevant provision of the Act did not apply to the Project. The court concluded that the structure of the underlying financing—which included a trust indenture, loan agreement, bond purchase agreement, and closing statement—was such that “the Project was not paid for ‘out of the funds’ of the Authority as a public body, which is what the plain language of Section 2(5) of the Act requires.” Notably, the court reasoned that because “Ursinus, and not the Authority, bore the risk for repaying the bonds, the economic reality of this transaction reveals that the Project is not public work subject to the Act.”

This decision represents a positive development for institutions of higher education, as well as other parties that finance construction projects through public bond offerings. The decision of the Board raised serious concerns that the Act potentially applied to a wide variety of projects that are structured similarly to the transaction described above.

A petition for allowance of appeal to the Supreme Court of Pennsylvania—Pennsylvania’s highest court—was filed on September 6, 2022, by the International Brotherhood of Electrical Workers, Local Union No. 98. The Supreme Court has discretion in determining whether to accept the appeal. The court has several months in which to consider the Union’s request to hear the appeal. A decision on that request to hear the appeal is unlikely before the end of the year. In the event the court accepts case for appeal, the appeal process before the Supreme Court typically takes 9 to 12 months. If the Supreme Court declines to hear the appeal, the decision of the Commonwealth Court stands.

McNees was proud to submit an amicus brief on behalf of a number of its higher education clients in support of the College’s appeal, and is available to assist you with any questions relating to the Prevailing Wage Act and bond financing matters generally. Contact us today if you have questions.

All attorneys representing municipal and other public sector clients should be aware of the potential for a United States Securities and Exchange Commission (SEC) investigation of their clients’ public bond deals.  Issuers generally will hire a team of professionals with specialized experience in public finance to assist them in completing a financing; such professionals commonly include bond counsel, disclosure counsel, and a municipal advisor.  But even the general practice solicitor that handles all day-to-day legal issues for the client will play an important role in the financing process. Continue Reading Solicitors: Help Avoid Targeting by the SEC in Municipal Bond Offerings

Since September 2021, the United States Securities and Exchange Commission (the SEC) has brought five enforcement actions regarding municipal bond financings.  The issuers of these bonds are Sweetwater Union High School District (Texas); Crosby Independent School District (California); Town of Sterlington (Louisiana); City of Rochester (and its school district) (New York); and Johnson City (Texas).  In each case, the issuers and other involved parties were charged with providing false and misleading information to municipal bond investors.  Enforcement was not limited to entities; individuals representing the issuers were also targeted. Additional information about these cases (and earlier cases) is available on the SEC website, at

Here are seven lessons to be learned from these cases: Continue Reading Seven Lessons to be Learned from Recent SEC Enforcement Actions Involving Municipal Bond Financings

The Securities and Exchange Commission (SEC) recently charged two chief financial officers of school districts with misleading investors in municipal bond offerings.  This should be a warning to municipal CFOs to be very careful to make appropriate disclosures when involved in their public entities’ bond issues.  An SEC official recently stated that “the SEC is committed to holding bad actors in municipal securities offerings accountable for their misconduct.”  Don’t be the CFO bad actor that the SEC targets! Continue Reading Municipal CFOs: Be Careful of your Bond Disclosures; the SEC is Gunning for You

The American Rescue Plan Act (“ARPA”) was enacted in March 2021 providing an unprecedented $1.9 trillion in direct relief to combat the effects Covid-19, whether it be negative economic impacts, public health implications, revenue loss, or identified needs in infrastructure.  Pennsylvania and its municipalities received approximately $14 billon in those federal ARPA funds!

ARPA funds come with certain new reporting requirements.  For municipalities, the first round of that new reporting (the “Project and Expenditure Report”) is due to the U.S. Treasury by April 30, 2022.  Every municipality that received ARPA funds must file this report (even if you haven’t spent anything yet).

Furthermore, and this is especially important, Continue Reading ARPA Reporting due April 30, 2022!

In December 2017, former President Donald Trump signed into law the Tax Cuts and Jobs Act. Among the many provisions of the Act was a provision that eliminated the tax exemption for municipal bonds that advance refunded another series of bonds. Prior to its passage, issuers had the ability to issue such bonds on a tax-exempt basis, and did so for a variety of reasons, including to achieve debt service savings. With the loss of tax-exempt status for advance refunding bonds issued after the passage of the Act, issuers and their advisors have searched for alternatives to the traditional tax-exempt advance refunding model.

In this article, we explore some of the alternatives that issuers have applied to achieve the same or similar benefits that would be achieved with a traditional tax-exempt advance refunding. First, we discuss the use of “forward delivery” bonds, where the bonds are sold, but not delivered to investors until a much later date in the future; second, we consider so-called “Cinderella” bonds, which are issued taxable but later convert to tax-exempt; and finally, “tenders and exchanges,” where issuers, often in conjunction with a current issuance, make an offer to investors to acquire their outstanding bonds, either for purchase or exchange. Continue Reading Four Years On, Alternatives to Tax-Exempt Advance Refundings Continue to Proliferate in Municipal Bond Market

In its recent decision, Appeal of Best Homes DDJ, LLC, 239-40 C.D. 2020 (Dec. 23, 2021), the Pennsylvania Commonwealth Court considered, among other issues, whether MS4 fees imposed by the City of Chester Stormwater Authority constituted an impermissible tax. The case involved a challenge by certain rate/fee-payers that the Authority’s “fees” were actually “taxes” because, according to the Appellants, the fees were revenue-generating and used for projects unrelated to stormwater management.

Holding in favor of the Authority, the Court concluded that the evidence presented by the Appellants was insufficient to meet their burden of proving that the fees were invalid. The Court’s decision is important because it outlines the significant fact evidence required to overturn a stormwater user fee. A full explanation of the Court’s decision, including other legal challenges brought against the Authority, can be found here on our State and Local Tax Blog.