Public Finance Alert
In Public Finance, questions on separation of church and state usually arise in the context of a conduit financing by a state or local governmental entity which benefits a religious organization. The religious organization generally is financing a capital asset used in a revenue producing enterprise such as a school or health care facility. Historically, the ability of a governmental entity to issue such conduit bonds for a religious organization required compliance with the Establishment of Religion Clause (the “Establishment Clause”) of the First Amendment of the United States Constitution (the “First Amendment”) and the relevant state’s laws, regulations and policies regarding separation of church and state (“State Religious Aid Restrictions”). These State Religious Aid Restrictions have usually been state constitutional or statutory provisions which are more stringent than the requirements of the Establishment Clause in restricting governmental aid to religious organizations.
On June 26, 2017, the United States Supreme Court (the “Court”) rendered its decision in the case of Trinity Lutheran Church of Columbia, Inc. v. Carol S. Comer, Director, Missouri Department of Natural Resources. The case is significant for separation of church and state jurisprudence primarily in its determination that the Free Exercise of Religion Clause (the “Free Exercise Clause”) of the First Amendment prevents the application of a State Religious Aid Restriction in a state constitution to a generally available public benefit program absent a compelling state interest.
An element of the case which is generally applicable to Public Finance conduit transactions is the Court’s basing its decision on the secular nature of the use to which the governmental benefit is put rather than the nature of the recipient, a pervasively sectarian entity. A majority of the Justices agreed with this position.
Another element of the case significant to Public Finance is that, to be validly applied, a State Religious Aid Restriction that impinges upon the Free Exercise Clause must be supported by a compelling state interest. This aspect of the case is grounded on a state’s desire to avoid participating in an “essentially religious endeavor”. The term is not defined or explained in the case except by comparison to an earlier case dealing with financial support in educating ministers. In addition, there was a diversity of opinion among the Justices as to the precedential value of the holding.
The Trinity Lutheran Church Child Learning Center (the “Center”) is a preschool and daycare center owned and operated by the Trinity Lutheran Church of Columbia, Inc. (“Trinity Lutheran”) in the State of Missouri (the “State”). Trinity Lutheran sought to replace a large portion of the surface at the Center’s playground with a rubber surface by participating in the State’s Scrap Tire Program. The program, run by the State’s Department of Natural Resources (the “Department”), offers reimbursement grants to qualifying nonprofit organizations that install playground surfaces made from recycled tires. In a letter rejecting Trinity Lutheran’s application, the Department explained that under Article I, Section 7 of the State’s Constitution, the Department could not provide financial assistance directly to a church. Article I, Section 7 of the State’s Constitution provides in relevant part: “That no money shall ever be taken from the public treasury, directly or indirectly, in aid of any church, sect or denomination of religion, or in aid of any priest, preacher, minister or teacher thereof, as such…” The Department ultimately awarded 14 grants as part of the 2012 program. Although Trinity Lutheran’s application for the Center ranked fifth out of the 44 applicants, it did not receive a grant because it is a church.
The Court held the Department’s express policy of denying grants to any applicant owned or controlled by a church, sect or other religious entity violated Trinity Lutheran’s rights under the Free Exercise Clause by denying the church an otherwise available public benefit because of its religious status.
Trinity Lutheran sued in Federal District Court, alleging that the Department’s failure to approve its application violated the Free Exercise Clause. The District Court dismissed the suit holding the Free Exercise Clause prohibits the government from outlawing or restricting the exercise of a religious practice, but it generally does not prohibit withholding an affirmative benefit on account of religion. The District Court held that the Free Exercise Clause did not require the State to make funds available under the Scrap Tire Program to Trinity Lutheran. In affirming, a divided panel of the Eighth Circuit ruled that, while the State could award a scrap tire grant to Trinity Lutheran without running afoul of the Establishment Clause, that did not mean that the Free Exercise Clause compelled the State to disregard the broader antiestablishment State Religious Aid Restriction principles reflected in the State’s Constitution.
The Court noted it has repeatedly confirmed that denying a generally available benefit solely because of religious identity imposes a penalty on the free exercise of religion citing McDaniel v. Paty, 435 U. S. 618. In McDaniel, the Court struck down a Tennessee statute disqualifying ministers from serving as delegates to Tennessee’s constitutional convention. A plurality recognized that such a law discriminated against McDaniel by denying him a benefit solely because of his status as a minister. In this case, the Court found the Department’s policy expressly discriminates against otherwise eligible recipients because of their religious character. Like the disqualification statute in McDaniel, the Court noted the Department’s policy of disqualifying churches from the Scrap Tire Program puts Trinity Lutheran to a choice: it may participate in an otherwise available benefit program or remain a religious institution. The Court stated that McDaniel holds that when a state conditions a benefit in this way, the state has imposed a penalty on the free exercise of religion that must be justified by a compelling state interest.
The Court rejected the Department’s argument that disqualifying Trinity Lutheran from a subsidy the State had no obligation to provide does not meaningfully burden the Trinity Lutheran’s free exercise rights and that absent any such burden the Department is free to follow the State’s constitutional prohibition on providing public funds directly to a church.
The Court also rejected the Department’s position that the case is controlled by Locke v. Davey, 540 U.S. 712. In Locke, the State of Washington created a scholarship program where recipients were free to use state funds at accredited religious and non-religious schools alike, but they could not use the funds to pursue a devotional theology degree. The Court distinguished Locke in that there the plaintiff was denied the scholarship not because of what he was but because he wanted to use the funds to pursue a divinity degree. In this case Trinity Lutheran was denied a grant simply because it was a church.
The Court noted the Locke case stated Washington’s restriction on the use of its funds was in keeping with the state’s antiestablishment interest in not using taxpayer funds to pay for the training of clergy, an “essentially religious endeavor,” which was significantly different than a program to use recycled tires to resurface playgrounds.
The Court held the Department’s discriminatory policy does not survive the “most rigorous” scrutiny that is to be applied to laws imposing special disabilities on account of religious status, citing Church of Lukumi Babalu Aye, Inc. v. Hialeah, 508 U. S. 520. The Court rejected the Department’s position that it was seeking to clearly avoid any violation of the Establishment Clause. That interest did not qualify as compelling in the face of the clear infringement on the Free Exercise Clause.
Reviewed from the perspective of Public Finance, particularly conduit financing to benefit religious organizations, the case is significant for the issues discussed below.
The import of the case for Public Finance is that, absent a compelling state interest, it is a violation of the Free Exercise Clause to deny access to a conduit financing program based on a State Religious Aid Restriction as to the religious status of the beneficiary so long as the proceeds of the financing will not be used for directly religious purposes. The same logic of the case would apply to other restrictions on or denials of generally available conduit financing based on the religious character of the organization as distinguished from the use of the proceeds. However, there is no elaboration of the concept of a compelling state interest that will sustain such a State Religious Aid Restriction beyond the avoidance of an essentially religious endeavor. Nor is there any guidance as to what constitutes an essentially religious endeavor beyond the religious education of the clergy. In addition there was a diversity of opinion among the Justices as to how to apply the principles of the case to other situations. See “CASE AS PRECEDENT”.
NATURE OF RECIPIENT. The seminal Court case considering conduit financing to benefit religious organizations is Hunt v. McNair 413 U. S. 734. While approving the bond program for private colleges and universities, including certain religiously affiliated colleges and universities, as consistent with the Establishment Clause, the Court left as an open question whether governmental conduit financing was available to pervasively sectarian organizations under the Establishment Clause. Subsequent cases have established that, subject to restrictions on the use of financed facilities for religious purposes, government conduit financing programs are available to pervasively sectarian religious organizations under the Establishment Clause. This case added to the line of cases under the Establishment Clause that focused on the secular purpose of the nonreligious use of the financed facilities in sustaining government aid to pervasively sectarian entities.
STATE RELIGIOUS AID RESTRICTIONS. Historically, due diligence in support of a conduit financing benefitting a religious organization required compliance with both the Establishment Clause and any applicable State Religious Aid Restriction. Given the trend of Establishment Clause jurisprudence in expanding permitted government aid to religious organizations, State Religious Aid Restrictions generally have more limitations on such government aid than the Establishment Clause.
Based primarily on McDaniel which involved a Tennessee statute, the Court found that the Department’s policy of rejecting applications from churches due to a State Religious Aid Restriction in the State Constitution violated the Free Exercise Clause without a compelling state interest in that the governmental aid program, did not involve an essentially religious endeavor.
The Court cites two cases considering the Free Exercise Clause in light of State Religious Aid Restrictions which extend the restrictions of the Establishment Clause. The McDaniel case found a violation of the Free Exercise Clause in the Tennessee statute preventing a clergyman from being a member of the constitutional convention while the Locke case found no such violation in Washington’s denying a publicly funded scholarship to obtain a divinity degree. In Locke,the State Religious Aid Restriction survived in a fact pattern of limited effect on the free exercise of religion and an essentially religious endeavor being excluded (educating ministers). In McDaniel, the State Religious Aid Restriction was struck down in a situation of extensive interference with the free exercise of religion in a fact pattern which did not involve an essentially religious endeavor.
USE OF PUBLIC FUNDS. Virtually all State Religious Aid Restrictions prohibit public moneys being paid to religious organizations and most go further in limiting governmental aid to religious organizations. See the list of State Religious Aid Restrictions in the dissent from the majority opinion in the case.
The case involves the delivery of public funds to the grant recipient as reimbursement of expenditures for qualifying playground resurfacing costs. In most cases, under state law, conduit financing is not considered the use of public moneys as the funds to pay the costs of the financed facilities come from the sale of bonds to private investors and not from a government treasury. Also the governmental issuer has no pecuniary obligations with respect to the financing or the financed facilities and all governmental costs are paid from the program.
In states which consider the moneys associated with conduit financing to be public funds prohibited from being paid to or for religious organizations by a State Religious Aid Restriction, the holding of the case offers possible relief if it is found such restriction is in violation of the Free Exercise Clause and there is no compelling state interest in the restriction, such as avoiding an essentially religious endeavor.
ESSENTIALLY RELIGIOUS ENDEAVORS. In this case, the antiestablishment principles in the State’s Constitution could not be applied where there was a conflict with the Free Exercise Clause as the State did not identify a sufficiently compelling state interest to justify the conflict. The Court cited with approval Locke as identifying an important state interest (not funding the religious education of ministers) which it characterized as an essentially religious endeavor. In neither this case nor in Locke did the Court elaborate as to what would otherwise constitute a compelling state interest or further define an essentially religious endeavor.
In Locke, the Court noted that Washington could have included divinity degrees in the scholarship program under the Establishment Clause but had the right to exclude them under the Free Exercise Clause. In that case, the program satisfied the Establishment Clause because the intervening choice of the students in determining how to use the scholarships removed the government from providing an impermissible benefit to religion. Absent such intervention, providing public scholarships for divinity degrees could have violated the Establishment Clause. Washington’s State Religious Aid Restrictions did not recognize this indirect benefit principle. The Court found Washington’s defense of this position by limiting the program, in light of the circumstances of the case, constituted a sufficiently compelling state interest to apply the State Religious Aid Restriction.
While not discussed in the case, a consideration of certain limitations on the uses of proceeds commonly found in governmental conduit financing programs may lend some color to the concept of essentially religious endeavors. In Hunt, the Court noted that the program was not available to finance facilities to be used for religious services or religious instruction or in connection with a school of divinity. These restrictions appear to be an important element in qualifying the programs under the Establishment Clause. Virtually all conduit financing programs follow the lead of the legislation noted in Hunt and exclude financing facilities to be used for religious services or religious instruction or in connection with a school of divinity. This is done by narrowly specifying the types of facilities that may be financed or having the exclusions noted in Hunt. These facilities appear appropriate for inclusion in the concept of essentially religious endeavors.
CONDUIT FINANCING AS A GENERALLY AVAILABLE GOVERNMENTAL AID PROGRAM. The case involved a program of grants for specific improvements, playground surfaces, which were available to nonprofit organizations operating such facilities. State and local conduit financing programs usually have restrictions on the eligible participants in the program that are not based on the religious status of the applicant. These program restrictions on participants usually have to do with the general nature of the organization, i.e. requiring nonprofit status as in this case; good standing in the state; credit criteria to protect the conduit issuer; and other matters relevant to a bond financing. Such nonreligious limitations should not affect the status of a conduit bond program as a generally available government aid program.
State and local conduit financing programs usually have restrictions on the types of facilities which can be financed, generally excluding facilities used for religious services, religious instruction or divinity schools. As these religious-based exclusions are necessary to qualify the program under the Establishment Clause, such religious limitations should not affect the status of a conduit bond program as a generally available government aid program.
CASE AS PRECEDENT. In the analysis of the play in the joints between the Establishment Clause and the Free Exercise Clause where State Religious Aid Restrictions are to be applied, the facts of the case, rather than strict legal principles of general applicability, tend to control. The subject of this case, the resurfacing of a children’s playground, was found to be outside an essentially religious endeavor while the effect on the free exercise of religion was significant, like McDaniel and unlike Locke.
As the facts of the case played such an important role in the outcome, the Justices varied widely in the scope of the decision as precedent. This is best evidenced in the different views on Footnote 3 which considered this point. Footnote 3 provided: “This case involves express discrimination based on religious identity with respect to playground resurfacing. We do not address religious uses of funding or other forms of discrimination.”
In regard to Footnote 3, the views of the Justices are instructive: Chief Justice Roberts delivered the opinion of the Court, except as to Footnote 3. Justices Kennedy, Alito and Kagan joined that opinion in full, and Justices Thomas and Gorsuch joined except as to Footnote 3. Justice Thomas filed an opinion concurring in part, in which Justice Gorsuch joined. Justice Gorsuch filed an opinion concurring in part, in which Justice Thomas joined espousing an expansive interpretation of the case. Justice Breyer filed an opinion concurring in the Judgment espousing a narrow interpretation of the case. Justice Sotomayor filed a dissenting opinion, in which Justice Ginsburg joined, taking the position that, as a church, Trinity Lutheran was a pervasively sectarian entity and virtually any governmental aid, other than passive aid not requiring any involvement by the beneficiary (such as police and fire protection), violated the Establishment Clause.