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Religious schools win legal victory

Even the most sectarian may use tax-exempt bonds for some facilities, state high court rules.

March 06, 2007|Maura Dolan | Times Staff Writer

SAN FRANCISCO — A government agency may issue tax-exempt government bonds to help religious schools pay for improvements, even if the schools are "pervasively sectarian," the California Supreme Court ruled 4-3 Monday.

Rejecting arguments by the state and civil libertarians, the court majority said judges who consider the constitutionality of such borrowing should focus on the "substance of the education provided" and not merely on the schools' "religious character."

The bonds, however, can be used only to build facilities where secular subjects will be taught in a way that is similar to teaching in nonreligious schools, the court said.

The ruling, which overturned two lower court decisions, opens the door for private religious schools to save millions of dollars in building new facilities. The schools that won the decision were Oaks Christian School in Westlake Village, California Baptist University in Riverside and Azusa Pacific University in Azusa, all Christian evangelical institutions that wanted to use tax-exempt bonds to pay for classrooms, dormitories, athletic facilities or dining halls.

"It is a great day for California kids because it is going to mean that a lot of financing can be done for private schools that otherwise might not have been able to be done," said Norman C. Hile, a lawyer for the public authority that wanted to issue the bonds for the schools.

The state has long permitted tax-free bonds for schools with religious affiliations, including Loyola Marymount and Santa Clara universities, whose prime missions are not religious.

Federal law already permits such financing for religious schools, and some states also have allowed it. But until this ruling, financing was not provided to California schools that used religion to determine enrollment and faculty and required all students to participate in religious activities.

Peter J. Eliasberg, managing lawyer for the ACLU of Southern California, called Monday's decision "a weakening" of separation of church and state.

But he said his main objection was that the decision would force judges to make decisions about curricula and possibly prompt religious schools to change their courses to take advantage of tax-exempt bonds.

"It's not good for religious institutions, and it's also not good for citizens who don't believe in financing a religious education," Eliasberg said.

In a long dissent, Justice Ming W. Chin noted that religion was mandatory at the schools and integral to every aspect of students' life, that students were admitted and faculty hired on the basis of religion and that religion was integrated into classroom instruction.

The state Constitution "simply does not permit a public entity to act as a fundraiser for schools of this nature," wrote Chin, joined by Justices Kathryn Mickle Werdegar and Carlos R. Moreno.

Designed to promote community development, the tax-exempt bond program is run by a joint-powers agency made up of 350 cities, including Los Angeles, plus counties and special districts. The public agency issues, sells and delivers the bonds and uses the proceeds to pay for the costs of the bond sale and the school projects.

"Because the government merely provides access to favorable tax treatment and does not itself finance the projects, this form of financing is commonly referred to as 'pass through' or 'conduit' financing," Justice Joyce L. Kennard wrote for the majority. She was joined by Chief Justice Ronald M. George, Marvin R. Baxter, and Carol A. Corrigan.

By using the government bonds, the schools will be able to borrow money at a lower interest rate and thereby reduce their costs. However, the state government loses tax revenue because the interest paid to the bondholders is not subject to state income taxes.

"The savings [to the schools] would be considerable," Chin said, noting that the Oaks Christian School would save about $52,500 a month as a result of the plan.

The ruling sends the financing proposals of the Christian schools back to the trial court, which will determine if the schools' curriculum is secular enough to qualify for the tax-free bonds.

Eugene J. Carron, another attorney for the bond-issuer, said the Christian schools involved in the case would be able to meet the court's standards, as would "the vast majority" of other religious schools. Whether such schools take advantage of the financing will depend upon how creditworthy they are, Carron said.

He said the ruling would affect any state-issued bonds, not just those issued by the joint-powers agency in question.

Deputy Atty. Gen. Zackery P. Morazzini, who had argued on the losing side, said the state high court created "a brand-new test."

"It is fairly straightforward in writing, but how it is applied and which schools will qualify for tax-free financing and which won't certainly remains to be seen," Morazzini said.

"We are blazing new trails here."

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