Cscda v. All Persons Interested

• Citation: 55 Cal.Rptr.3d 487,152 P.3d 1070,40 Cal.4th 788
• Decision Date: 05 March 2007
• Docket Number: No. S124195.,S124195.
• Court: California Supreme Court
• Parties: CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY, Plaintiff and Appellant, v. ALL PERSONS INTERESTED IN the MATTER OF the VALIDITY OF a PURCHASE AGREEMENT, Respondents.

55 Cal.Rptr.3d 487

40 Cal.4th 788

152 P.3d 1070

CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY, Plaintiff and Appellant, v. ALL PERSONS INTERESTED IN the MATTER OF the VALIDITY OF a PURCHASE AGREEMENT, Respondents.

No. S124195.

Supreme Court of California.

March 5, 2007.

Orrick, Herrington & Sutcliffe, Norman C. Hile, Sacramento, Margaret Carew Toledo, Michael C. Weed, Sacramento, Eugene J. Carron, Megan V. Hamilton, Los Angeles, Richard I. Hiscocks, San Francisco; and Gerald F. Uelmen, for Plaintiff and Appellant.

Sidley Austin Brown & Wood, Jeffrey A Berman, Mark E. Haddad, Los Angeles, Gene C. Schaerr and Nicholas 0. Miler, for Asuza Pacific University, California Baptist University, Oaks Christian School, Loma Linda University, The Association of Independent California Colleges and Universities,

Association of Christian Schools International, Seventh-Day Adventist Church State Council and The Assemblies of God Financial Services Group as Amici Curiae on behalf of Plaintiff and Appellant.

Center for Law & Religious Freedom, Gregory S. Baylor, Steven H. Aden, M. Casey Mattox and Samuel B. Casey, for Council for Christian Colleges and Universities and Christian Legal Society as Amici Curiae on behalf of Plaintiff and Appellant.

Bill Lockyer, Attorney General, Manuel M. Medeiros, State Solicitor General, James M. Humes, Chief Assistant Attorney General, Louis R. Mauro, Assistant Attorney General, Catherine Van Aken, Leslie R. Lopez and Zackery P. Morazzini, Deputy Attorneys General, for Respondents.

Jordan Budd, San Diego, Elvie Cacciavillani; Margaret C. Crosby; and Peter Eliasberg, Los Angeles, for American Civil Liberties Union Foundation of San Diego and Imperial Counties, American Civil Liberties Union Foundation of Northern California, Inc., and ACLU Foundation of Southern California as Amici Curiae on behalf of Respondents.

KENNARD, J.

Recognizing that an educated citizenry and workforce are vital to the preservation of the rights and liberties of the people of this state, California in 1879 included in its new Constitution a provision directing the state Legislature to encourage "by all suitable means the promotion of intellectual, scientific, moral, and agricultural improvement." (Cal. Const., art. IX, § 1.) Since 1879, our state Constitution has also included a provision prohibiting state and local governments from granting anything "in aid of any . . . sectarian purpose, or help[ing] to support or sustain any school, college, university, hospital, or other institution controlled by any . . . sectarian denomination whatever. . . ." (Cal. Const., art. XVI, § 5; see id., former art. XIII, § 24, repealed Gen. Elec. (Nov. 5, 1974).)

Against that backdrop, this court in California Educational Facilities Authority v. Priest (1974) 12 Cal.3d 593, 116 Cal. Rptr. 361, 526 P.2d 513 (Priest), upheld a state bond program funding the construction of educational facilities at religiously affiliated colleges, which were expressly prohibited from using the bond proceeds (paid for by private purchasers of the bonds) for specified religious purposes. We concluded that neither the state nor the federal Constitution prohibited this form of indirect assistance to religiously affiliated colleges, a rule that for more than three decades has allowed California public entities to issue revenue bonds to raise private funds for campus improvements at religiously affiliated colleges. We declined in Priest, however, to decide whether that rule would also apply if a college were "pervasively sectarian," a term the United States Supreme Court had used in Hunt v. McNair (1973) 413 U.S. 734, 93 S.Ct. 2868, 37 L.Ed.2d 923 (Hunt) to describe a religiously affiliated school that devotes a substantial portion of its functions to its religious mission. (Priest, supra, at p. 602, fn. 8, 116 Cal. Rptr. 361, 526 P.2d 513.) Our decision in Priest is pivotal here.

This case involves bond financing agreements between a public entity and three religiously affiliated schools that, for purposes of this litigation, the parties have assumed to be pervasively sectarian. These schools are thus likely to include a religious perspective in their teachings. Each agreement, as in Priest, supra, 12 Cal.3d 593, 116 Cal.Rptr. 361, 526 P.2d 513, expressly prohibits use of the bond proceeds for specified religious purposes. And, as in Priest, funds for the projects will not come from any government entity but from private-sector purchasers of the bonds, and no public entity will have any obligation on the bonds in the event of default by the schools.

The trial court; invalidated the agreements as violating the state Constitution's article XVI, section 5. The Court of Appeal, in a two-to-one decision, upheld the trial court; the dissent would have validated the agreements.

As explained below, in resolving the state constitutional issue we conclude that the pertinent inquiry should center on the substance of the education provided by these three schools, not on their religious character. Therefore, whether the schools are pervasively sectarian (as the parties have assumed) is not a controlling factor in determining the validity of the bond funding program under our state Constitution. Rather, the program's validity turns on two questions: (1) Does each of the recipient schools offer a broad curriculum in secular subjects? (2) Do the schools' secular classes consist of information and coursework that is neutral with respect to religion? This test ensures that the state's interest in promoting the intellectual improvement of its residents is advanced through the teaching of secular information and coursework, and that the expression of a religious viewpoint in otherwise secular classes will provide a benefit to religion that is merely incidental to the bond program's primary purpose of promoting secular education.

Finally, we conclude that a public bond program satisfying our state Constitution would not violate the establishment clause of the First Amendment to the federal Constitution.

I

A. The Nature of This Action

Government Code section 6502 provides that "two or more public agencies by agreement may jointly exercise any power common to the contracting parties," thus allowing for the creation of so-called joint powers authorities.¹ A joint powers authority can issue tax exempt revenue bonds to finance construction projects that provide a public benefit and are located within the geographical boundaries of its member public agencies. (§ 6588 et seq.)

As relevant here, some 350 California cities, counties, and special districts have entered into agreements to create a joint powers authority, known as the California Statewide Communities Development Authority (the Authority), plaintiff in this case. By issuing tax exempt revenue bonds to finance industrial projects, residential units, as well as health care and educational facilities, the Authority promotes economic development for the benefit of its members. The Authority does not fund these projects or otherwise provide any financial subsidy in connection with the issuance of the bonds. It is involved in the financing transaction solely to provide a tax exemption to the private investors who purchase the bonds and thereby fund the private development. 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; the government's issuance of the bonds provides a "conduit" for private financing to "pass through" to the recipient of the bond proceeds. (See Note, Revenue Bonds and Religious Education: The Constitutionality of Conduit Financing Involving Pervasively Sectarian Institutions (2002) 100 Mich. L.Rev. 1108, 1111 (Revenue Bonds and Religious Education).) No public monies are expended in this type of arrangement as the recipient of the bond proceeds bears responsibility for payments of principal and interest to the private bond purchaser, which has no recourse against the government. (Id. at pp. 1146, 1149-1150; see § 91535.) In addition, the recipient also reimburses the public entity for the costs of issuing the bonds. (Revenue Bonds and Religious Education, supra, at p. 1150.)

Under the statutory scheme, the Authority may issue tax exempt bonds "whenever there are significant public benefits for taking that action." (§ 6586.)² In the case of educational institutions, the Authority requires that the beneficiary school be exempt from taxation under section 501(c)(3) of the Internal Revenue Code (26 U.S.C. § 501(c)(3)).³ The tax exempt status of the bonds, however, does not flow from the tax exempt status of the schools. Rather, the income that bondholders derive from bonds that the Authority has issued is exempt from taxation under Government Code section 6575 and section 103 of the Internal Revenue Code (26 U.S.C. § 103(a)), which exempt from taxation the income earned on state and local bonds. Thus, the program here is simply a mechanism by which the government extends favorable tax treatment to private individuals to encourage private financial support of development that will provide a public benefit to the community. The program encourages private support of certain activities and programs by way of a tax policy, just as income deductions provided in connection with private donations to tax exempt organizations encourage private support of certain activities and organizations.

In May and July 2002, the Authority adopted resolutions approving agreements to issue revenue bonds to fund campus improvements at three private schools (Oaks Christian School, California Baptist University, and Azusa Pacific University), all operated by tax exempt religious corporations. As to each school, the Authority found that the planned projects would produce one or more of the significant public benefits set out in section 6586. Thereafter, the...