U.S. Supreme Court Decision in Espinoza v. Montana Department of Revenue Confirms Availability of Municipal Bond Financing for Religious Organizations

Public Finance Alert | July.08.2020

Historically, the ability of a governmental conduit issuer to issue bonds to facilitate a financing for a religious organization or a religiously affiliated school, university, senior housing facility or other nonprofit institution, raised concerns that such a financing might run afoul of the required compliance with the Establishment of Religion Clause (the “Establishment Clause”) of the First Amendment (the “First Amendment”) of the United States Constitution, which generally prohibits the government from advancing religion or becoming entangled with religious activity.  Certain financings also raised concerns about whether such a financing violated the relevant state’s laws, regulations and policies (“State Religious Aid Restrictions”), some of which are more restrictive than the requirements of the Establishment Clause relating to governmental aid to religious organizations.  The concern was elevated when a borrower was “pervasively sectarian” given certain Supreme Court case law on this matter.

On June 30, 2020, the United States Supreme Court (the “Court”) rendered its decision in the case of Espinoza v. Montana Dep’t. of Revenue (“Espinoza”). This client alert expands on and updates our previous alert, titled “Public Finance Implications of the Trinity Lutheran Case” published in August 2017 (“Trinity Lutheran”). The Espinoza case, together with Trinity Lutheran (which the Court relied heavily on in the Espinoza decision), is significant for separation of church and state jurisprudence in its determination and reaffirmation that the Free Exercise of Religion Clause (the “Free Exercise Clause”) of the First Amendment prevents the application of State Religious Aid Restrictions to a generally available public benefit program based on an organization’s religious status, absent a compelling state interest and narrow tailoring of such restrictions.

The Court considered a tax credit program instituted by the State of Montana to fund a nonprofit scholarship program meant to allow for greater parental and student choice in education, and held that the application of State Religious Aid Restrictions in Montana’s Constitution, which precluded application of this program to religiously affiliated schools, discriminated against the status of religious schools and families in violation of the Free Exercise Clause of the U.S. Constitution. In the Espinoza case, as in Trinity Lutheran, the Court held that disqualifying otherwise eligible recipients from a public benefit solely due to their religious status is not necessary to prevent a violation of the Establishment Clause and places a burden on the free exercise of religion guaranteed in the First Amendment.

In our view, Espinoza makes it clear that a generally available conduit financing program cannot exclude borrowers based on religious affiliation, no matter how pervasively sectarian, and no matter how closely tied to church, synagogue or mosque.