WASHINGTON – Churches may have new opportunities for tax-exempt bond financing of secular projects such as gymnasiums and cafeterias because of a recent U.S. Supreme Court decision saying Missouri could not deny a grant for a playground owned by a Lutheran church, bond lawyers said.

The June 26 ruling, in Trinity Lutheran Church of Columbia, Inc. v. Carol S. Comer, director, Missouri Department of Natural Resources, widens a door that was opened for tax-exempt financing for religiously affiliated schools in an earlier Supreme Court decision in 2002, according to Scott Rolfs, managing director for religion and education finance at Ziegler in Chicago.

The high court's 7-2 decision involved Trinity Lutheran Church Child Learning Center’s application for a state grant to replace a pea gravel playground with a pour-in-place rubber surface from recycled tires under Missouri’s Scrap Tire Program. The application ranked fifth in merit among 44 applications but was denied one of the 14 grants because the learning center is owned by a church. The state's Department of Natural Resources offers reimbursement grants to qualifying nonprofits that install the rubber surfaces but has a policy of denying grants to any applicant owned or controlled by a church.

Trinity Lutheran sued the department director in a federal district court, alleging the department's policy violated the free exercise clause of the First Amendment of the Constitution, which ensures laws do not prohibit the free exercise of religion. The district court dismissed the case on grounds the free exercise clause did not require the state to make funds available under its Scrap Tire Program.

The U.S. Court of Appeals for the Eighth Circuit affirmed that decision. The church appealed to the Supreme Court, which reversed the appeals court ruling and remanded the case back for further proceedings consistent with its opinion.

The Supreme Court's majority found that the state department's policy violated the rights of Trinity Lutheran under the free exercise clause of the First Amendment by denying the church an otherwise public benefit on account of its religious status.

“This Court has repeatedly confirmed that denying a generally available benefit solely on account of religious identity imposes a penalty on the free exercise of religion,’’ Chief Justice John Roberts wrote in the majority opinion.

The consequence of the denial, Roberts wrote, is "in all likelihood, a few extra scraped knees. But the exclusion of Trinity Lutheran from a public benefit for which it is otherwise qualified, solely because it is a church, is odious to our Constitution all the same, and cannot stand."

“The importance of the case for public finance is that, absent a compelling state interest, it is a violation of the free exercise clause to deny even pervasively sectarian religious organizations access to a conduit bond financing program,’’ Orrick, Herrington & Sutcliffe said in a public finance alert issued on Aug. 24.

Some church clients already are considering new avenues for tax-exempt financing, said Kareem Spratling of the law firm Bryant Miller Olive in Tampa.
Some church clients already are considering new avenues for tax-exempt financing, said Kareem Spratling of the law firm Bryant Miller Olive in Tampa. Bryant Miller Olive

Some church clients already are considering new avenues for tax-exempt financing, Kareem Spratling, a shareholder at Bryant Miller Olive in Tampa, Fla., said in an interview. But none have yet made a final decision, he added.

Spratling said one issue for churches seeking tax-exempt financing to consider is whether the facility would be open and available to the public. Another issue is whether the project, if not directly tied to religious instruction, may have some crossover with a religious instruction. An example of this would be a roof that covers both a church and a gymnasium.

But Len Weiser-Varon, a member of the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston, also said there are complexities to consider. He suggested a decision might not be clear in a proposed financing of a home economics classroom that may also be used for religious classes or a cafeteria project where the menu is strictly kosher.

Church sanctuaries and worship centers remain disqualified from using the tax-exempt proceeds for directly religious purposes. Instead, many churches, synagogues, temples and other houses of worship around the nation use taxable bonds to finance new buildings or renovations.

Charles Major, president and chief compliance officer of Share Financial Services in Dallas, said he expects the recent Supreme Court case to have “negligible impact on the bulk if the underwritings done by the six companies’’ he said have carved out a niche specializing in offering taxable bonds to houses of worship.

Major belongs to a trade association made up of his firm and five other investment banking firms in this area: American Investors Group in Minnetonka, Minn.; CND Financial in Bulverde, Texas; Great Nation Investment Corp. in Amarillo, Texas; Security Church Finance in Houston and B.C. Ziegler in Chicago.

Ziegler, which is the only one of the six that also does tax-exempt financing, provides that service to religiously-affiliated elementary and secondary schools, charter schools and other private schools.

Rolfs said Ziegler has 15 years of experience assisting religiously affiliated schools obtain tax-exempt bond financing dating back to the 2002, when the U.S. Supreme Court upheld an Ohio school voucher program in the Cleveland School District in Zelman v. Simmons-Harris.

“I think it absolutely put the principle of Zelman in stone,’’ Rolfs said, emphasizing that the earlier decision was a split 5-4 majority and the Trinity Lutheran was a more decisive 7-2 ruling.

The Missouri decision also said municipalities and states can’t discriminate on eligibility for public services. “‘They used the Missouri case to say there’s a public interest in providing safe playgrounds and you can’t single out one religious group and it needs to be provided to everyone,’’ Rolfs said.

Rolfs said a 2002 decision of the U.S. Court of Appeals for the Sixth Circuit, in Steele v. Industrial Development Board of Metropolitan Government Nashville that involved Lipscomb University in Tennessee, also has been used as a legal basis for underwriting tax-exempt bonds for religious schools.

“I would say those were eligible to be financed even before the Missouri case this summer,’’ Rolfs said. “Because when we look at these projects with the bond attorneys, we look at them very much along the use of the facility being financed. We compartmentalize it. If the primary use is for health or education, then that will generally override any tangential religious flavor running through it.’’

The new opportunity as a result on the Missouri decision, Rolfs said, may be for churches to sponsor charter schools because public education could be considered a public service. "I think this case opens the door for religious organizations to potentially open and operate charter schools on a state by state basis depending on what states are authorizing,’’ he said.

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