Opinion ID: 2635249
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Heading Rank: 1

Heading: A. The Nature of This Action

Text: Government Code section 6502 provides that two or more public agencies by agreement may jointly exercise any power common to the contracting parties, thus allowing for the creation of so-called joint powers authorities. [1] A joint powers authority can issue tax exempt revenue bonds to finance construction projects that provide a public benefit and are located within the geographical boundaries of its member public agencies. (§ 6588 et seq.) As relevant here, some 350 California cities, counties, and special districts have entered into agreements to create a joint powers authority, known as the California Statewide Communities Development Authority (the Authority), plaintiff in this case. By issuing tax exempt revenue bonds to finance industrial projects, residential units, as well as health care and educational facilities, the Authority promotes economic development for the benefit of its members. The Authority does not fund these projects or otherwise provide any financial subsidy in connection with the issuance of the bonds. It is involved in the financing transaction solely to provide a tax exemption to the private investors who purchase the bonds and thereby fund the private development. Because the government merely provides access to favorable tax treatment and does not itself finance the projects, this form of financing is commonly referred to as pass through or conduit financing; the government's issuance of the bonds provides a conduit for private financing to pass through to the recipient of the bond proceeds. (See Note, Revenue Bonds and Religious Education: The Constitutionality of Conduit Financing Involving Pervasively Sectarian Institutions (2002) 100 Mich. L.Rev. 1108, 1111 ( Revenue Bonds and Religious Education).) No public monies are expended in this type of arrangement, as the recipient of the bond proceeds bears responsibility for payments of principal and interest to the private bond purchaser, which has no recourse against the government. ( Id. at pp. 1146, 1149-1150; see § 91535.) In addition, the recipient also reimburses the public entity for the costs of issuing the bonds. ( Revenue Bonds and Religious Education, supra, at p. 1150.) Under the statutory scheme, the Authority may issue tax exempt bonds whenever there are significant public benefits for taking that action. (§ 6586.) [2] In the case of educational institutions, the Authority requires that the beneficiary school be exempt from taxation under section 501(c)(3) of the Internal Revenue Code (26 U.S.C. § 501(c)(3)). [3] The tax exempt status of the bonds, however, does not flow from the tax exempt status of the schools. Rather, the income that bondholders derive from bonds that the Authority has issued is exempt from taxation under Government Code section 6575 and section 103 of the Internal Revenue Code (26 U.S.C. § 103(a)), which exempt from taxation the income earned on state and local bonds. Thus, the program here is simply a mechanism by which the government extends favorable tax treatment to private individuals to encourage private financial support of development that will provide a public benefit to the community. The program encourages private support of certain activities and programs by way of a tax policy, just as income deductions provided in connection with private donations to tax exempt organizations encourage private support of certain activities and organizations. In May and July 2002, the Authority adopted resolutions approving agreements to issue revenue bonds to fund campus improvements at three private schools (Oaks Christian School, California Baptist University, and Azusa Pacific University), all operated by tax exempt religious corporations. As to each school, the Authority found that the planned projects would produce one or more of the significant public benefits set out in section 6586. Thereafter, the Authority filed these validation actions, seeking superior court approval of the agreements. For purposes of these lawsuits, and apparently to create test cases, the Authority assumed, without conceding, that each of the three schools was pervasively sectarian, as the United States Supreme Court used that term in Hunt, supra, 413 U.S. at page 743, 93 S.Ct. 2868, meaning that a substantial portion of [each school's] functions are subsumed in its religious mission. Each of the three lawsuits is a validation action, a form of proceeding in rem brought against all persons interested in a specified matter. (Code Civ. Proc., §§ 860, 861.1.) In a validation action, the party seeking court approval must publish notice of the lawsuit in a newspaper of general circulation and set a date for anyone interested to appear and contest the legality or validity of the matter sought to be determined. ( Id., § 862.) The Authority did so. When no interested party responded, the Authority moved for default judgment!} in the three actions. The trial court, on its own initiative, continued the matters to solicit the views of the California Department of Fair Employment and Housing as well as the California Attorney General. The former declined to participate. The latter responded by letter brief, expressing no view on the Authority's entitlement to the default judgments. Instead, the Attorney General merely pointed out possible state and federal constitutional issues raised by the proposed bond funding agreements. The trial court found the agreements invalid under article XVI, section 5 of the California Constitution and under the establishment clause of the First Amendment to the federal Constitution. But in its order denying the Authority's request for validation of the agreements with the three schools, the trial court relied exclusively on the state constitutional ground. The Authority appealed. The Court of Appeal consolidated the three cases, and, in a two-to-one decision, affirmed the trial court. Relying solely on the California Constitution, as the trial court had done in its order denying validation of the bond funding agreements, the Court of Appeal held that issuing revenue bonds to raise capital in the private sector for improvements at pervasively sectarian schools would violate article XVI, section 5. But the dissenting justice concluded to the contrary. And, unlike the majority, the dissent went on to address the federal constitutional issue, concluding the bond funding agreements did not violate the establishment clause of the federal Constitution's First Amendment. The Authority sought review in this court. It contended that the Court of Appeal's decision casts doubt on the eligibility of all sectarian schools to obtain government services and threatens to impede educational opportunities for hundreds of thousands of students in California. We granted review, and thereafter we granted the Attorney General's motion to intervene as respondent in the case.