By Dec. 31, 2024, any Pennsylvania borough, municipality, or local governmental unit that received funds from the American Rescue Plan Act of 2021 (ARPA) will need to have these funds obligated and these obligations must include plans to spend these funds by Dec. 31, 2026.

As background, ARPA was enacted in 2021 and it provided funding to counties, cities and local governmental units to assist in various COVID-19 recovery efforts. According to the Pennsylvania Department of Economic and Community Development (DCED), these funds are being provided for the purposes of: supporting COVID-19 response efforts as well as replace lost revenues, support economic stability for households and businesses, and address systemic public health and economic challenges. As part of the ARPA funding, Pennsylvania local governments began receiving their $6.15 billion portion of the state and local fiscal recovery funds (SLFRF) in the summer of 2021. Since receiving that SLFRF funding, Pennsylvania boroughs, municipalities and local governmental units have been working on determining the best use of these funds.

With this pending deadline rapidly approaching, Pennsylvania boroughs, municipalities and local governmental units have to ensure compliance with the ARPA spending requirements in order to avoid a loss of these funds.

In this article, we will review the potential opportunities and uses for these remaining ARPA funds and the timeframe for identifying and obligating these projects to ensure compliance with the ARPA spending requirements.

Uses

The Pennsylvania DCED website provides important information regarding the permitted uses of spending for these ARPA funds. Specifically, the DCED states that any recipient of these funds may use these funds for the following purposes:

  • Support public health expenditures, funding for COVID-19 mitigation efforts, medical expenses, behavioral health care and certain public health and safety staff
  • Address negative economic impacts caused by the public health emergency, including economic harms to workers, households, small businesses, impacted industries and the public sector
  • Replace lost public sector revenue, using this funding to provide government services to the extent of the reduction in revenue experienced due to the pandemic
  • Provide premium pay for essential workers, offering additional support to those who have and will bear the greatest health risks because of their service in critical infrastructure sectors
  • Invest in water, sewer and broadband infrastructure, making necessary investments to improve access to clean drinking water, support vital wastewater and stormwater infrastructure, and to expand access to broadband internet

In order to comply with these spending requirements, Pennsylvania boroughs, municipalities and local governmental units will need to ensure that any identified project qualifies as furthering one of these categories. To further aid Pennsylvania boroughs, municipalities, and local governmental units, the U.S. Department of Treasury has prepared a “Frequently Asked Questions for the Local Fiscal Recovery Funds program,” which may be found on the U.S. Department of Treasury’s website: //home.treasury.gov/system/files/136/SLFRPFAQ.pdf.

Spending Requirements

In accordance with the ARPA spending requirements, the funds must be spent on any costs that were incurred by the borough, municipality or local governmental unit from May 3, 2021, and Dec. 31, 2024. This means that these funds must be obligated for identified projects prior to the Dec. 31, 2024, deadline. Then the funds must actually be spent by Dec. 31, 2026, on these identified projects.

The definition of “obligation” originates from 31 Code of Federal Regulations 25.3 and means an order placed for property and services and entry into contracts, subawards and similar transactions that require payment. Further, upon additional clarification from the U.S. Treasury, as noted in the U.S. Treasury obligation interim final rule quick reference guide, a recipient is also considered to have incurred an obligation by Dec. 31, 2024, with respect to a requirement under federal law or regulation or a provision of the SLFRF award terms and conditions to which the recipient becomes subject as a result of receiving or expending SLFRF funds. Accordingly, under the second part of the definition of obligation set out above, a recipient may use SLFRF funds to cover costs related to: reporting and compliance requirements, including subrecipient monitoring; single audit costs; record retention and internal control requirements; property standards; environmental compliance requirements; and civil rights and nondiscrimination requirements.

Pennsylvania boroughs, municipalities and local governmental units must ensure that any remaining SLFRF funds are obligated as per these requirements by Dec. 31, 2024.

Conclusion

As Pennsylvania borough, municipality and local governmental unit leaders are working to determine the amount of remaining ARPA funds, it is important to keep in mind the permitted uses for the spending of these funds, the ability of the local governmental unit to obligate these funds by Dec. 31, 2024, and the feasibility of being able to spend these funds on those identified projects by Dec. 31, 2026, to ensure compliance with the ARPA spending requirements.

Martha “Frannie” Reilly is co-chair of McNees Wallce & Nurick’s public finance and government services group and chair of the firm’s charitable and nonprofit and environmental, social and governance (ESG) groups. Serving clients from Devon, she advises charitable and nonprofit organizations on fiduciary duties, compliance, planning and other matters. She can be reached at freilly@mcneeslaw.com or 484-329-8036.

Ryan Gonder is a public finance, government services, and state and local tax attorney with the firm. Serving clients from Harrisburg, he leverages his unique combination of professional and educational experiences to truly appreciate clients’ concerns for technical analysis and serve as an effective advocate while providing value to the matter on which he is working. He can be reached at rgonder@mcneeslaw.com and 717-237-5340.   

Reprinted with permission from the July 26, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The United States Department of the Treasury (Treasury) on June 3, 2024 published proposed regulations on Internal Revenue Code (IRC) Sections 45Y and 48E, which provide for clean energy production and investment tax credits for projects placed in service after Dec. 31, 2024. The clean energy tax credits provided by IRC Sections 45Y and 48E replace the tax credits previously offered by IRC Sections 45 and 48.

IRC Sections 45Y and 48E were added pursuant to the Inflation Reduction Act of 2022 (the Act), which authorized a variety of clean energy investments and tax credits. The benefits of these tax credits also are available to governmental entities and nonprofits exempt from federal income taxation. The Act also added IRC Section 6417, which permits these entities to elect to receive a direct payment from Treasury equal to the amount of the credit. You can read our prior commentary on IRC Section 6417 and its impact on publicly-financed clean energy projects here.

Under the Act, projects qualifying for the IRC Section 45Y and 48E tax credits must demonstrate that they have a greenhouse gas emissions rate of not greater than zero. Treasury in the proposed regulations has indicated that it will publish annual tables to determine whether a particular facility meets the requirements. Projects not covered by the annual tables must file a petition with Treasury to establish the emissions rate.

Treasury also proposed rules for determining which property is included in the definition of a “qualified facility,” a critical determination for the IRC Section 48E credit (which is equal to a percentage of the cost basis of such property). A qualified facility is generally defined to include “all functionally interdependent components of property that are operated together and that can operate apart from other property to produce electricity.”

Also included for purposes of the IRC Section 48E credit calculation are any components of property that are an “integral part” of the qualified facility, i.e., used directly in the intended function of the facility and essential to the completeness of such function. In addition to the general rule provided by the definition, Treasury proposed specific rules for certain types of property which may satisfy the “integral part” test. For example, under the proposed regulations roads may qualify as an “integral part” of a facility, but fences never do.

Treasury in the proposed regulations did not provide rules on the application of the prevailing wage and apprenticeship requirements, which if met, result in a quintupling of the base credit (for example, increasing the IRC Section 48E credit from 6% to 30%). Those rules will be finalized in a separate rule-making.

Treasury will hold public hearings on Aug. 12 and 13 to hear comments from the public regarding the guidance. Interested parties have the opportunity to submit public comments. If you have questions about the proposed regulations, or would like to submit comments, please contact a member of the McNees Public Finance or Energy and Environmental Groups for assistance.

The Pennsylvania Office of Open Records issued an alert concerning anonymous Right to Know Law requests generated by an online service called FOIA Buddy after receiving reports from “numerous” agencies. 

On its website, FOIA Buddy describes itself as a “comprehensive resource” that simplifies the process of requesting public information from the agencies by which it is maintained. Officials at the OOR are unsure of the website’s owner and operator. 

Here is what you need to know in the event your municipality receives such a request: 

  • OOR Response: The OOR cannot provide specific legal advice on how to handle these anonymous RTKL requests. Its memo did specify that if an appeal is filed by the requester and that requester is deemed valid, your municipality will be able to justify your decision. 
  • Suspicious Requests: If your municipality receives a request that is flagged by your information technology professionals as spam or a phishing attempt, you have the authority to determine the appropriate course of action. 
  • Review Your Policy: The office recommended that agencies ensure their internal RTKL policies are clear, especially those sections that specify when requests will be accepted and rejected. If you do not accept anonymous public information requests, publish this policy “prominently” on your website. 

The OOR is expected to publish Final Determinations once appeals involving FOIA Buddy requests are processed. We will share updates with you then. 

In the meantime, it is worth noting that in three recent Final Determinations, the office has issued consistent findings: If requesters do not sufficiently demonstrate that they are legal U.S. residents, they do not meet the definition of a requester under Pennsylvania’s RTKL. 

  • “Ryan” v. Cumberland County, OOR Dkt. AP 2024-0349: Even though the requester gave a first name and Pennsylvania zip code, there is nothing to show that he or she actually lives in the U.S. Therefore, the request is considered anonymous and the OOR cannot make Cumberland County respond. 
  • “John Doe” v. Pennsylvania Department of Community and Economic Development, OOR Dkt. AP 2024-0543: The requester did not show the required proof of U.S. residency, so the request is considered anonymous and invalid under the RTKL. 
  • “Anonymous” v. Downingtown Area School District, OOR Dkt. AP 2023-2329: The requester, again, did not offer evidence that he or she resides in the U.S. and the request is considered anonymous and invalid. 

The Pennsylvania Broadband Development Authority (Authority) recently announced the award of $204 million for 52 broadband development projects throughout Pennsylvania. The grants are funded through the United States Treasury (Treasury) under the American Rescue Plan Act of 2021 (ARPA), which authorized the use of funds for broadband infrastructure projects targeted at unserved or underserved households and businesses. Combined with private matching funds, the awards will result in over $400 million of broadband projects throughout Pennsylvania.

The Authority awarded these grants pursuant to its Broadband Infrastructure Program (BIP), which is funded under the Capital Projects Fund (CPF), a $279 million program funded by Treasury under ARPA. The Authority awarded BIP grants throughout Pennsylvania – in sum, 42 of the Commonwealth’s 67 counties received at least one grant. Each county receiving the funds has partnered with an internet service provider (ISP) for the completion of the project (with the ISP putting up the matching funds). Not surprisingly, the bulk of the grants went to two of the largest broadband providers in Pennsylvania – Comcast and Verizon.

Successful grant applicants had to demonstrate their digital equity efforts to ensure long-term, sustainable service and affordable access for lower income households. Eligible projects include line extension and last mile services as well as large-scale regional infrastructure projects so long as those large-scale projects achieve last mile connections. Successful applicants also had to demonstrate that their project would include a long-term plan that would demonstrate sustainability beyond the initial investment to maintain, repair, and upgrade the network to ensure continued operation in the future in the absence of federal funding.

Grants ranged from less than $500,000 to almost $10 million – with the largest grant going to Windstream Pennsylvania, LLC, in Clarion County, in the amount of $9,792,155. Taking into account matching funds, Windstream’s project will inject over $20 million of broadband infrastructure development into Clarion County. While matching funds in the aggregate amounted to just under 50% of total project cost, individual projects’ matching funds varied, with many as low as 25%, to a high of 70% of project cost.

Approved projects are contingent on the successful execution of subgrantee agreements and any other necessary contractual arrangements between parties that will be involved in deploying the broadband infrastructure. Grantees must complete the projects by the end of 2026, consistent with federal guidance. It is anticipated that some projects will be completed by the end of 2024.

Grantees must maintain robust records, as the Authority retains the right to audit and request information about a particular project at any time during the project period. In issuing guidance for BIP, the Authority emphasized the importance of deploying high-quality infrastructure, avoiding costly delays, and promoting efficiency. Grantees also must certify that project expenses were incurred pursuant to the approved scope of work approved by the Authority.

Grantees must submit quarterly and annual progress reports to the Authority. Grantees should expect the Authority to maintain frequent contact with them to ensure that projects are moving forward in a timely and cost-effective manner. The Authority will withhold the final 10% of grant funds until the final project report has been submitted to and reviewed by the Authority to its satisfaction.

The robust program reporting requirements are necessary to provide the Authority with the information needed to meet its own accountability requirements. The Authority is required to prepare annually a report detailing the funded projects. Additionally, the accounts and books of the Authority are subject to examination and audit by the Auditor General.

The Authority is a special purpose state entity, established pursuant to Act 96 of 2021, and is governed by an eleven-member board, including six agency heads (or their designees), the Executive Director of the Center for Rural Pennsylvania (or a designee), two members of the Senate, and two members of the House of Representatives. The Governor selects the Chair from the Authority’s board members. Board members are not compensated and serve in a fiduciary relationship with the Commonwealth and the Authority regarding the Authority’s use of money and investments.

The Authority has a limited lifespan; it is required to dissolve in December 2031 or when all available federal funds have been exhausted, whichever comes first. Funding available under CPF Program appears to have been exhausted, as the Authority recently announced that its $45M Multi-Purpose Community Facilities Program was set to close on April 20, 2024 and was oversubscribed at the time of the April 18, 2024 meeting. The Authority has also announced plans to award $20 million from CPF to address the need for devices such as laptops at schools and libraries and other non-profit organizations. Details of this program will be made available by the Authority soon.

The Authority also has federal funds available to it under the Broadband Equity, Access, and Deployment (BEAD) program established by the Infrastructure Investment and Jobs Act of 2021 (IIJA). The BEAD program authorized over $40 billion in federal funding to expand high-speed internet access through planning, infrastructure deployment and adoption programs. Pennsylvania’s share of this funding amounted to $1.16 billion.

The Authority also stands to receive millions of dollars in federal funding under the Digital Equity Act (DEA), which also enacted as part of the IIJA. DEA was enacted to fund programs to promote the meaningful adoption and use of broadband services to low-income households, aging populations, incarcerated individuals, veterans, individuals with disabilities, individuals with a language barrier, racial and ethnic minorities, and rural residents.

With the significant amount of federal funding still available to the Authority, it has been increasing its staff in recent months to manage these programs. The Authority previously adopted in August 2023 a Five-Year Plan, “Internet for All,” to outline its goals and vision for the expenditure of these funds. We expect that additional grant opportunities will be announced in the near term as the Authority ramps up its plan for the expenditure of these funds.

Reprinted with permission from the May 9, 2024 edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The Pennsylvania Broadband Development Authority is currently accepting applications for the multipurpose community facilities program. Funded through the federal capital projects fund established under the American Rescue Plan Act (ARPA), the facilities program will distribute up to $45 million in competitive grants to community anchor institutions and local governments to ensure reliable and affordable broadband internet access.

When persons and households do not have reliable internet access, they often rely on community anchor institutions to provide that access. Through this facilities program, the authority is looking to expand broadband access across the commonwealth.

The authority defines a community anchor institution as “an entity, including any school, library, health clinic, health center, hospital or other medical provider, public safety entity, institution of higher education, public housing organization or community support organization, which facilitates greater use of broadband service by vulnerable populations, including low-income individuals, unemployed individuals, and aged individuals, that lack access to gigabit-level broadband service.”

Created by Act 96 of 2021, the authority is an independent agency within the Pennsylvania Department of Community and Economic Development that serves as the single point of contact for entities desiring to deploy broadband in the commonwealth. In establishing guidelines for the facilities program, the authority is building off its grant administration experience with last year’s broadband infrastructure program, which focused on facilitating last mile service connections in unserved and underserved areas of the commonwealth. In contrast to the broadband infrastructure program, the facilities program applicants do not need to provide matching funds for their projects.

The facilities program is expected to be highly competitive, so it is important for municipalities and community anchor institutions to identify their projects for the application submission. Municipalities and community anchor institutions will want to carefully review the facilities program guidelines when conceptualizing a project and conveying that project to the authority to maximize their competitiveness in the application process.

Guidelines for Eligibility and Project Costs

A successful applicant will need to demonstrate that its project meets the various criteria found in the facilities program guidelines. This involves a building or public space that is open to the public and directly enables and enhances vocational, educational, and health monitoring services at the facility. Eligible project costs include:

  • Pre-construction costs, such as data gathering.
  • Feasibility studies.
  • Public/community engagement efforts.
  • Equity and needs assessments.
  • Permitting.
  • Planning.
  • Architectural design.
  • Engineering.
  • Any necessary environmental, historical, or cultural reviews.
  • Repairs, rehabilitation, construction, improvement, and acquisition of real property, facilities, and equipment (such as devices/technology).

Administrative costs are eligible but are limited to 2.5% of the grant award; otherwise, operational expenses are not eligible costs. Further, grant funds may not be used for short-term operating leases, payment of interest on debt or other debt service costs; satisfaction of a legal judgment; securing other financing; lobbying; fines; and general construction projects that otherwise do not meet project eligibility criteria.

Compliance and Accountability Measures

Emphasizing the importance of a long-term investment, the authority requires applicants to include a sustainability model or long-term plan that demonstrates the ability to cover all necessary costs (including property taxes/rents); a commitment to retain occupancy at the facility for five years; a detailed plan for maintaining the facility without federal funding; and a detailed list of intended project outcomes and means to verify progress, risks, and assumptions. An applicant must provide a final report within three months after project completion. The final 10% of grant funds will be held until after submission of the final report and the authority’s satisfaction of project completion.

Compliance with the facilities program is a crucial component to a successful grant. Applicants must provide the authority with access to all relevant records, including data, reports, contracts, and documents relevant to a funded project. An applicant will be required to certify that its expenses were incurred pursuant to the scope of work approved by the authority. The authority may, under its discretion, conduct a formal audit of any funded project. The authority’s guidelines thus reflect the commonwealth’s objective to ensure cost-efficient deployment of the substantial injection of federal funds over a relatively condensed period of time.

Per Act 96 of 2021, the authority’s board must issue an annual report detailing funded projects. The accounts and books of the authority shall be examined and audited by the auditor general. The authority will dissolve in 10 years in December 2031 or when all available federal funds have been exhausted, whichever comes first. Presently, the authority is governed by an 11-member board, including six agency heads (or their designees), the executive director of the Center for Rural Pennsylvania (or a designee), two members of the Senate, and two members of the House of Representatives. The governor selects the chair from the authority’s board members.

Next Steps

The facilities program application period will close on April 20. The minimum grant amount is $250,000 and the maximum amount is $2 million. At this time, the authority plans to announce awards July-August 2024, with construction envisioned to commence in September 2024. All projects must reach substantial completion before Dec. 31, 2026. Facilities program guidance is available at Capital Projects Fund Multi-Purpose Community Facility Program Guidelines (pa.gov).

If you have questions regarding the authority and the multipurpose community facilities program, please do not hesitate to contact us.

Reprinted with permission from the April 2, 2024 edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

On April 24, 2024 the Pennsylvania Emergency Management Agency (PEMA) announced it is accepting applications from eligible non-profits for funding to enhance physical and cybersecurity at organizations that may be at risk for terrorist or extremist attacks. Organizations may apply for up to $150,000 per location, at a maximum of three locations. Each location must submit an application. Funding allocated to Pennsylvania for fiscal year 2024 is $3.2 million, and there is no cost share requirement. Applications must be made by 5:00 pm on May 29, 2024.  Successful applicants will receive notice of such awards no later than September 30, 2024.

Eligibility guidelines will follow criteria established by the Federal Emergency Management Administration. Non-profits that may apply include camps, educational facilities, houses of worship, museums, senior living facilities, community and social service organizations, event venues, medical facilities, science organizations, and shelters and crisis centers. Funding may be used for a variety of planning, communication, security, cybersecurity and facility upgrades, such as sensors, alarms and camera systems.

A successful application will require the organization to demonstrate why it could be a target for an attack, including being a highly recognized or national institution or have a demonstrated record of threats made against the organization. The application will also require the organization to outline what vulnerabilities a site or its communications infrastructure may have, as well as the consequences of an attack on the organization and the communities it serves.

For more information, including additional information, a link to the application, fact sheet and an FAQ, visit PEMA’s website here, or contact the McNees team below.

Kevin Sunday

Policy Advisor, McNees Strategic Solutions Group

ksunday@mcneeslaw.com

Frannie Reilly, Esq.

Co-Chair, Public Finance & Local Government

Chair, Charitable and Non-Profit 

freilly@mcneeslaw.com

The U.S. Department of Transportation recently announced the availability of billions of dollars in grant funds for infrastructure and transportation projects, including over $700 million allocated to the Rural Surface Transportation Grant Program. This program offers funding for highway, bridge and tunnel projects that provide or increase access to agricultural, commercial, energy or transportation facilities supporting rural economies. Interested parties must act fast if they wish to apply – the deadline is May 6, 2024.

Both state and political subdivisions may apply for funding through this program. Eligible projects include any publicly owned highways and bridges, so long as they support rural economies. Highway safety improvement projects also qualify.

Through PennDOT, the Commonwealth previously applied for and was awarded a grant for $69 million under the program, for the 2022 fiscal year. This grant is to be used to pay for a portion of the costs of the Central Susquehanna Valley Transportation Project – Southern Section, in Snyder County. This project includes the construction of approximately 6.1 miles of a new four-lane limited access highway, connecting U.S. Routes 11/15 near Selinsgrove to U.S. Route 15 near Winfield. Once completed, the project is anticipated to improve traffic safety, reduce delays, and increase access to various tourism and other sights in the area.

While municipalities in other states have secured funding through this program for local projects, Pennsylvania counties, cities, townships and boroughs have been shut out from the millions of dollars made available to date. With the many locally owned bridges in Pennsylvania’s rural communities in need of repairs, an award under this program may be just what is needed to get a project off the ground.

For more information about the program and this funding opportunity, you can visit the Department of Transportation’s website.

What Is ESG?

The term “ESG” stands for environmental, social, and governance principles. While individuals may understand what these letters represent, many people are looking to understand why ESG is relevant, what ESG means in practice, and how it can be incorporated into business practices to the advantage of the business. In the last several years, ESG has become a hot topic and, for many, is the new standard of excellence for businesses moving forward. These principles, at their core, provide a framework for businesses to measure the tangible impacts of these issues on their operations and bottom line, as well as the community at large. This framework expands this analysis to account for a broader group of stakeholders.

Sustainability of a business now depends on more factors than ever before. Environmental sustainability focuses on a reduction of energy and water consumption—in particular a reduction of carbon and greenhouse gas emissions—as well as an improvement in recycling and waste reduction efforts.

Social sustainability focuses on how a business treats people both inside and outside of the organization. This includes not only compliance with safety and labor regulations, but also includes a business’ approach to diversity, equity, and inclusion (DEI) as well as overall impact of the business on its community. The current focus has even expanded to where consumers will take into account a business’ global social impact, including use of overseas labor in countries with exploitative practices or the sourcing of materials from countries rife with social and political oppression. This factor also includes fair compensation plans, including addressing the gap between executive and other employee compensation, as well as transparency within an organization.

Sustainability from a governance perspective depends on the consistent and ethical management of a business at all levels. Starting with the board, a business must intentionally focus on the board composition to determine who is making decisions on behalf of the business. In addition, the board and senior staff need to focus on the impact of these decisions including the impact of various policies and procedures. Are they being applied fairly? Are they responsive to issues faced by the business? These are all questions business leaders face when determining whether a business is well-governed for a sustainable term.

One of the main goals of the ESG principles is to determine whether a business is sustainable. By incorporating good environmental, social, and governance practices, a business is making an intentional effort to focus on core components identified in a 2004 Report from the United Nations titled “Who Cares Wins,” which was a joint initiative of financial institutions.

Recognizing the importance of these factors, the next question is—how does a business obtain funds to pay for these sustainable practices? As discussed below, one option is the IRA.

What Is the IRA?

The Inflation Reduction Act of 2022 (IRA) was signed into law on Aug. 16, 2022. The IRA’s main purpose is to direct federal spending in a way that will reduce carbon emissions which will, in turn, lower health care costs and reinvigorate investments in domestic manufacturing and infrastructure. The IRA encourages the procurement of materials and supplies from domestic sources or from countries that are free-trade partners with the United States. The IRA also aims to incentivize the research and development and, ultimately, the commercialization of carbon capture, storage, and clean hydrogen technologies.

The IRA not only supports many of the ESG principles and goals outlines above, but also gives a fresh incentive to ESG investing. Indeed, the IRA has earmarked $369 billion for climate change and green energy investments over the next ten years and enhances many existing energy-related tax credits such as credits for renewable electricity production, sustainable aviation and biofuels, electric vehicles and infrastructure, and greenhouse gas reductions.

The IRA is also aimed at supporting social policies by tying many of these credits to an organization’s satisfaction of prevailing wage and apprenticeship requirements and investment in low-income communities. There is also an emphasis on domestic manufacturing and job creation.

What Are ESG Projects That Could be Funded by the IRA?

The primary focus of the IRA is the reduction of greenhouse gas emissions, which is squarely in line with ESG’s environmental principles. What is unique about the IRA is that many of the funds dedicated to this reduction will be allocated to projects that focus on historically marginalized and low-income communities—thereby also addressing ESG’s “S” principles. By way of illustration, the communities that are typically located closest to heavy industrial areas, waste treatment, storage, and disposal facilities, and shipping ports tend to be low-income communities.

These communities are also disproportionately impacted by the pollution from these facilities, and generally higher utility bills which further compound their financial difficulties. The funds set aside by the IRA are, in part, meant to support programs that aim to provide better access to energy efficient buildings that will lower utility costs for these communities and spur development initiatives. There are also additional funds earmarked for affordable housing projects with the aim of creating new businesses in these communities in addition to alleviating the effects of pollution in these areas.

The Greenhouse Gas Reduction Fund created by the act will also create opportunities for grants and funding to support research and development related to zero-emission technologies as well as funding advancements in waste treatment and storage. There are also new incentives available to manufacturers of renewable energy such as solar, offshore wind, geothermal, hydrogen, and nuclear aimed at invigorating domestic renewable energy production.

These incentives, primarily in the form of tax credits, are earmarked for projects in various industries including agriculture, real estate development, and shipping. These projects include funding for zero-emission port equipment and technology as well as additional funding for low emission trucks and heavy-duty vehicles used in these industries. The IRA has also provided increased tax credits and funding for companies and suppliers in hard-to-abate industries. In particular funding for building and material suppliers that work with iron, steel, concrete, glass, pulp, paper, ceramics, chemical production, and refining. These tax credits are designed to spur new private investment in clean energy, transportation, and manufacturing using “direct pay” credits—meaning organizations can claim the full amount even if their tax liability is less than the credit.

In addition to these tax credits, the US Department of Energy’s Loan Program will receive $12 billion to create a new loan program dedicated to upgrading, repurposing, or replacing energy infrastructure. The goal is that with broader incentivization of lower-carbon energy sources should, in time, also result in reduced emissions in other industries such as hospitality, retail, and office buildings.

How Do Organizations/Governmental Entities Prepare for These Projects?

Businesses should assess their current carbon footprint and emissions data. The primary focus of the IRA is to reduce emissions across all industries. In order to take advantage of these incentives, businesses will need good metrics and data to determine their baseline and to keep track of progress.

Many of the incentives and opportunities discussed above are tied to the satisfaction of prevailing wage and apprenticeship requirements. As a preliminary matter, before taking advantage of any of these opportunities, businesses should examine their own compliance with these principles. These programs also focus on incentivizing investment in low-income and energy communities. Businesses, therefore, should identify those communities in their area that qualify, and involve themselves with those community leaders and stakeholders to effectively develop projects that will capitalize on the opportunities offered by the IRA.

With respect to domestic manufacturing and job creation, businesses will need to thoroughly examine their current supply chain in order to recoup the tax benefits being offered. For example, the incentives offered may vary depending on where a manufacturer’s component materials come from, where they are assembled, as well as other variables. Businesses will likely see increased flexibility in their supply chains as different industries and investors try to capture the maximum benefits offered by the IRA.

What are some compliance issues that need to be considered to accept these IRA funds? There are several important provisions and restrictions within the IRA that may impact tax obligations and reporting requirements both for businesses and their clients. This may require adjusted profit and loss calculations. Additionally, the 15% minimum tax on corporate profits above $1 billion could have other implications.

Therefore, before taking advantage of the tax credits or grant funds available, businesses should meet with their legal and financial advisers to understand their reporting obligations and potential impacts on their business. This includes compliance with prevailing wage laws, safety and labor regulations, as well as diversity standards required by the IRA. Businesses interested in obtaining this funding must establish good governance policies and procedures to ensure compliance with the IRA requirements.

The IRA also includes requirements for more transparent, uniform standards in labeling for product declarations related to carbon impact. This will require fund recipients to ensure that they have accurate data and adequate internal processes for synthesizing and reporting that data. This will ensure compliance and allow organizations to track their success.

Reprinted with permission from the March 15, 2024 edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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.