Revenue bonds and religious education: the constitutionality of conduit financing involving pervasively sectarian institutions.

• Author: Collier, Trent

INTRODUCTION

The Establishment Clause (1)--and particularly the issue of government funding of religious education (2)--is one of the murkiest areas of Supreme Court jurisprudence. (3) The Supreme Court has acknowledged as much, (4) and the sharp divide in the Court's most recent forays into Establishment Clause territory illustrates the point that the current jurisprudential standards allow for a broad range of interpretation. (5) There is some hope that the Supreme Court will provide further clarification of its Establishment Clause standard in the near future. (6) For now, however, it appears that the dominant mode of Establishment Clause analysis is the examination of a government program's purpose and effect, a test first articulated in 1970 in Lemon v. Kurtzman (7) and modified over twenty years later in Agostini v. Felton. (8)

Generally, in assessing the constitutionality of government aid to religious institutions, the Court looks to the aid's purpose and effect (9) Any form of government aid must have a secular purpose and an effect that does not (1) result in indoctrination attributable to the government, (2) use religious criteria to identify potential recipients, or (3) lead to an excessive entanglement between church and state. (10) In addition to this inquiry into a program's purpose and effect, the Court may consider whether the government aid has the purpose or effect of endorsing religion in the eyes of a reasonable observer. (11)

As might be expected, lower courts have applied these guidelines to reach widely conflicting results. One particular controversy concerns the eligibility of "pervasively sectarian" (12) colleges to receive government loans funded by revenue bonds. (13) Revenue bonds are often issued by specialized government agencies created and authorized by statute (14) to issue municipal bonds in pursuit of a particular goal, (15) such as the promotion of higher education. (16) In such cases, the government agency (the "authority") serves as a conduit, issuing the bonds on behalf of a particular private entity and loaning the revenue from the issuance to the private entity to finance a specific project or improvement. (17) The parties to this transaction typically appoint a third party as trustee to "monitor[] the institution's payments, creditworthiness, and compliance with terms of the loan," (18) thereby minimizing the role of the issuing authority in the transaction. (19) This financing arrangement provides a distinct benefit to each party. Bond purchasers benefit because interest on certain municipal securities, including revenue bonds, may be exempt from federal income taxation. (20) Bond purchasers accept lower rates of return on the bonds due to this tax exemption (21) and, therefore, a private entity may finance an improvement more cheaply than if the entity had borrowed from a private financial institution. (22) By creating these incentives for both bond purchasers and private entities, revenue bonds advance the legislatively mandated agenda of the issuing authority and therefore benefit the state or local government. (23)

Recent decisions from the Virginia Supreme Court and the District Court for the Middle District of Tennessee illustrate the constitutional dilemma that arises when pervasively sectarian institutions participate in this sort of financing arrangement. Taxpayers in these states have challenged revenue bond issuances that benefit religious colleges and universities as a violation of the Establishment Clause's prohibition against laws "respecting an establishment of religion." (24) In Lynn, the Supreme Court of Virginia considered whether Regent University ("Regent") was eligible to use proceeds generated from the Virginia College Building Authority's issuance of revenue bonds to finance construction projects on its campuses. After determining that Regent was a pervasively sectarian institution (25)--in other words, that religion so infused Regent's curriculum that it was impossible for the government to separate its secular and religious functions when distributing aid (26)--the Virginia Supreme Court held that Regent could nevertheless participate in the revenue bond program without violating the Establishment Clause. (27) The court reasoned that, given this conduit-financing arrangement, any funds that Regent received were not government aid as such, that the program did not create an incentive for students to choose religious over secular education, and that Regent received government funds only as the result of bond purchasers' private choices. (28)

The District Court for the Middle District of Tennessee heard a case factually similar to Lynn but reached the opposite conclusion. (29) In Steele v. Industrial Development Board, (30) the district court considered the constitutionality of a bond issuance benefiting David Lipscomb University ("Lipscomb"), an institution much like Regent in its integration of "Christian faith and practice with the pursuit of academic excellence." (31) As in Lynn, the district court found that Lipscomb was pervasively sectarian. (32) Unlike the Virginia Supreme Court, however, the district court held that the revenue bonds were a direct benefit from the state and, consequently, that the bond issuance had the impermissible effect of advancing religion. (33)

The only Supreme Court opinion to address this controversy directly appears, at first glance, to support the district court's conclusion in Steele. In Hunt v. McNair, (34) the Supreme Court held that a revenue bond issuance benefiting a sectarian institution did not violate the Establishment Clause, (35) but noted that conduit financing would have the effect of advancing religion when used to fund a loan for a pervasively sectarian institution. (36) The underlying logic of Hunt, and the major constitutional concern of the pervasively sectarian standard, is that when a college is so sectarian in nature that its religious mission infuses any otherwise secular activity, it is impossible for the government to ensure that aid flows only to the institution's secular functions. (37)

While Hunt's standard is unambiguous, the case may no longer be good law. In the almost thirty years since Hunt, the Supreme Court's approach to Establishment Clause issues, as well as its understanding of when the government may provide aid to religious institutions, has undergone dramatic transformation. (38) In order to address the Lynn/Steele split, then, it is necessary to reconsider the constitutionality of conduit-financing arrangements that benefit private, pervasively sectarian colleges in light of the Court's recent jurisprudence.

This Note argues that a government authority does not violate the Establishment Clause by issuing revenue bonds to finance a loan to a pervasively sectarian institution because such aid does not involve public funds, is neutrally available, and entails only a minimal and largely indirect relationship between the government and the pervasively sectarian institution. (39) Part I argues that, although Hunt v. McNair once settled this issue, subsequent Supreme Court decisions have undermined two logical predicates of the pervasively sectarian test, thereby requiring courts to use pervasive sectarianism as a factor in the overall Establishment Clause determination rather than as a presumptive invalidation of government aid. Part II explains that revenue bond issuances benefiting pervasively sectarian institutions do not advance religion according to the Supreme Court's current standard. Finally, Part III examines the ultimate church-state relationship in conduit financing, and argues that because recipients of revenue bonds do not receive public funds as such and because the government has only a minimal role in the bond issue, any church-state relationship arising from conduit financing arrangements does not rise to an unconstitutional level of entanglement. This Part also applies the endorsement test to show that the only act of real constitutional significance--the authority's approval of a revenue bond issuance that would benefit a pervasively sectarian institution--is not an endorsement of religion. This Note concludes that the unique character of a revenue bond issuance allows pervasively sectarian institutions to participate in this government activity without violating the Establishment Clause.

1. THE ONGOING EVOLUTION OF THE PERVASIVELY SECTARIAN TEST

   This Part contends that the constitutional validity of revenue bond issuances benefiting pervasively sectarian institutions is an open question, despite a series of Supreme Court decisions that, at first glance, suggest the contrary. Section I.A outlines the basic constitutional principles and the application of those principles through the pervasively sectarian standard in Tilton v. Richardson, (40) Hunt v. McNair, (41) and Roemer v. Board of Public Works. (42) This Section argues that the main impetus behind the pervasively sectarian standard is twofold: it depends both on the presumption that an institution's religious functions are inseparable from its secular ones, and that actual diversion of government funds to religious indoctrination is always impermissible. Section I.B contends that the Court's Establishment Clause jurisprudence since the "Tilton trilogy" (43) has significantly undermined these predicates for the pervasively sectarian standard by overruling the presumption that certain institutions will divert secular aid to religious purposes and by allowing the diversion of government aid in certain cases. Thus, according to the Supreme Court's current standard, the question is not whether the government may aid pervasively sectarian institutions but rather under what conditions the government may aid such institutions.

   1. Diversion as the Root of the Pervasively Sectarian Inquiry

      This Section explores the jurisprudential origins of the pervasively sectarian test, and argues that it is...