Tax-Exempt Bonds? Not for Pervasively Religious Schools

Apr 07, 2005
ACLU of Northern California

In the Fall of 2002, three Southern California fundamentalist schools needed money to construct new facilities.  The schools discriminate in hiring and admission along religious lines and infuse every class and extracurricular activity with religion. 

The schools sought tax-exempt bonds from the California Statewide Communities Development Authority.  The government can issue tax-exempt bonds to nonprofit organizations, acting as an intermediary--a governmental conduit--between the organization and the lender.  The organization is able to borrow money at a lower rate, but the state loses tax revenue.  In other words, the state subsidizes part of the cost of the loan.

The Development Authority asked the Sacramento Superior Court to validate the financing, which would prevent anyone from challenging the bonds' constitutionality.  Recognizing that funding pervasively sectarian schools raises serious constitutional issues, the judge in this case invited analysis from the Attorney General and other organizations. 

The ACLU filed a brief arguing that issuing a tax-exempt bond for religious schools would violate the California Constitution's strict No Aid clause. Because the schools integrate religion into every aspect of the curriculum, the ACLU argued, governmental conduit financing would subsidize the school's religious teaching. This plainly violates the state Constitution's ban on public aid to religious institutions. The Sacramento Superior Court agreed and refused to validate the bond transaction. 

The Development Authority filed an appeal, but the Court of Appeal agreed that conduit financing of religious schools violates Article XVI, Section 5 of the California Constitution. They ruled unanimously that conduit financing "clearly provides a 'benefit' in that it enables sectarian institutions to borrow money through the use of a state instrumentality at a cost below that of the marketplace." One school, for example, would save $58,000 a month by using tax-exempt bonds rather than conventional financing.  The Court stated that providing this financial assistance has a direct, immediate, and substantial effect of promoting religious doctrine.

The California Supreme Court has granted review of the case. The ACLU has again submitted an amicus brief.  The case will establish an important precedent in the area of government subsidy of religion in California at a time when faith-based initiatives are promoted throughout the country.

Learn more:

California Statewide Communities Developement Authority v. All Persons Interested in the Matter of the Validity of the Purchase Agreement