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On March 9, 20042006, a divided Third District Court of Appeal held that the provision of "conduit financing" through the issuance of tax-exempt bonds to "pervasively sectarian" private schools violates the California Constitution.
CAPSO will become party to an amicus letter requesting the California Supreme Court to review the decision.
The case, California Statewide Communities Development Authority v. All Persons upheld three separate rulings issued by a Sacramento Superior Court judge that invalidated the issuance of tax-exempt bonds to the Oaks Christian School in Westlake Village, California Baptist University in Riverside, and Azusa Pacific University.
The rulings were based on Article XVI, Section 5 of the California Constitution (the so-called "Blaine Amendment"), which reads:
Neither the Legislature, nor any county, city and county, township, school district, or other municipal corporation, shall ever make an appropriation, or pay from any public fund whatever, or grant anything to or in aid of any religious sect, church, creed, or sectarian purpose, or help to support or sustain any school, college, university, hospital, or other institution controlled by any religious creed, church, or sectarian denomination whatever; nor shall any grant or donation of personal property or real estate ever be made by the State, or any city, city and county, town, or other municipal corporation for any religious creed, church, or sectarian purpose whatever; provided, that nothing in this section shall prevent the Legislature granting aid pursuant to Section 3 of Article XVI.The appellate court upheld the rulings in a 2-1 decision. Justice Richard Sims II, writing for the majority, argued that the plain meaning of Article XVI, Section 5 supports the trial judge's ruling. In a dissenting opinion, Justice George Nicholson contended that accompanying limitations ensure that conduit financing arrangements do not have a substantial effect of supporting religious activities.
Prior to the ruling, private schools (both religious and non-sectarian) were permitted to use tax-exempt bonds to finance projects such as the construction of gymnasia, residence halls and parking structures. Applicants were required to show how financed projects would benefit the surrounding community and to sign a statement declaring that no facility financed by tax-exempt bonds would be used for religious instruction or worship.
The California Statewide Communities Development Authority (CSCDA) is a joint powers authority created by the California Legislature in 1988. Since its creation, the CSCDA has issued more than $16 billion in tax-exempt bonds to local governments and private entities throughout the state.
Conduit financing is an arrangement in which a school (or other entity) transfers property to a bond-issuing authority on condition that the property be transferred back together with the issuance of bonds under an installment sale agreement. The school then uses the proceeds of the bond issue to finance its project, and benefits from the lower interest rates associated with tax-exempt bonds.
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