California Statewide Communities Developement Authority v. All Persons Interested in the Matter of the Validity of the Purchase Agreement
The issue in this case is whether the California Constitution allows the government to underwrite part of the cost of a religious school's borrowing money to construct facilities. The government issues tax-exempt bonds to nonprofit organizations, acting as a conduit between the organization and lender, so that the interest on the loan is not taxed. This allows the organization to borrow money at a lower rate. The state therefore loses revenue, essentially subsidizing part of the cost of the loan. The question presented by this case is whether providing this benefit to a pervasively sectarian school, which integrates religion into every aspect of the curriculum and discriminates in admission and hiring along religious lines, violates the California Constitution's ban on public aid to religious institutions.
The government agency, California Statewide Community Development Authority, filed a petition asking the court to approve a proposal to conduct conduit financing for a pervasively religious school. Although this kind of lawsuit, a validation proceeding, has no opposition party, the judge invited analysis from the Attorney General and other organizations. The ACLU Foundations of California filed a brief arguing that the transaction would violate the California Constitution's strict No Aid clause.
The Sacramento Superior Court issued a ruling, refusing to validate the transaction, on the grounds that it would violate the state Constitution. The Authority has filed a notice of appeal.