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Bonds offer cheap financing but sometimes controversy for religious schools

Posted: Friday, May 03, 2002

BOSTON (AP) -- When Gordon College needed millions of dollars to build a new dormitory, it joined a growing number of colleges and some private secondary schools using tax-exempt bonds to raise the money.

Because Gordon is nonprofit, investors who buy the bonds don't have to pay taxes on interest payments. That means the school can offer the bonds at a lower interest rate, which could save the school millions over the bonds' 30-year terms.

Gordon, located in suburban Wenham, raised $6.5 million and plans another $39 million bond issue for another dorm and to refinance old debt.

There is a catch, however: Gordon is, unmistakably and proudly, a Christian college. Students and faculty must sign a pledge to recognize the Bible as the word of God and ''call themselves Christian'' through a ''personal commitment to Jesus Christ.'' Professors are asked to teach all subjects from a Christian perspective. Chapel attendance is required twice a week.

Nationwide, similar schools have had their bonds' tax-exempt status challenged by groups who claim it amounts to state support of religion. Some judges have agreed, although the law is unclear.

The schools maintain it would be religious discrimination to deny them the bonds.

So far, nobody has challenged Gordon or the Massachusetts Development Finance Authority, known as MassDevelopment, the state agency that issued the bonds. The school claims the exemption is appropriate because it is using the money for a dormitory, not an overtly religious building such as a chapel.

No public funds are used to pay the bonds, although the government does lose tax revenue on the interest. The state serves as a conduit, a legal requirement for the nonprofits to get the tax exemption, and the bonds' credit is backed separately.

However, because the school essentially limits enrollment to Christians, critics say the bonds violate the standard of nondiscrimination that MassDevelopment says it applies when deciding who can benefit from its services.

The issue is a somewhat obscure offshoot of related debates about how much indirect support government can provide for religious schools -- textbooks, lunches and busing, for example.

''Whether one characterizes them as a tax exemption or a cash benefit, the loss to taxpayers and citizens is the same, and in many cases runs to the tune of millions of dollars,'' said Ayesah Khan of American United for Separation of Church and State.

Khan's group sued unsuccessfully to invalidate bonds issued for Pat Robertson's Regent University in Virginia. ''The heart of the establishment clause is that taxpayers not be forced to support a religious institution,'' Khan said.

The religious schools read the First Amendment differently: They say it prohibits the government from denying them, on religious grounds, a tax exemption available to anyone else.

''The ACLU's position is asking government to discriminate against religion,'' said Martin Nussbaum, a Colorado attorney who has represented a number of schools in such cases. ''That's shameful.''

Nussbaum says the state is simply providing a neutral government service. Telling religious schools they can't take advantage is like telling church members the fire department won't protect them or they can't use a national park, he said.

The only U.S. Supreme Court decision on such financings is nearly 30 years old. It upheld such bonds as long as schools are not ''pervasively sectarian.'' The standard has allowed financings for Catholic schools such as Georgetown University and Boston College, where many students aren't Catholic and faculty do not have to teach from a particular religious perspective.

But some say the standard forces judges to conduct a kind of inquisition into how religious a school is.

That happened in the Regent case. In 1999, a circuit judge ruled against the university, citing faculty handbooks and applications that stated the university's purpose as ''glorifying God and his Son Jesus Christ.''

But that ruling was overturned and other cases, including one in a case involving Jerry Falwell's Liberty University and others in Michigan and California, have produced a mish-mash of law.

Many believe that if the Supreme Court revisits the issue, it will side more clearly with religious schools. The court, on a number of issues, has tilted lately toward letting religious schools receive at least indirect government aid.

''Clearly that's where the pressure is,'' said Robert Sedler, a law professor at Wayne State University in Detroit who unsuccessfully argued the Michigan case.

A major tax-exempt bond investor says the threat of invalidation on religious grounds is a minor concern.

''We're looking at the financial well-being of the institution, rather than what's going on with religion, or some other factor we don't think is particularly relevant to the credit quality,'' said Bob McIntosh, chief economist and manager of 12 municipal bond funds at Eaton Vance, a Boston investment firm that manages about $7 billion in municipal bond assets.

In fact, a religious affiliation can make the bonds more attractive.

''(It's) a niche that can actually be a positive,'' he said. ''You might have a slightly steadier source of incoming students.''

Indeed, religious institutions make up a small fraction of what McIntosh estimates is $1.3 trillion in outstanding municipal bond debt nationwide, on about 50,000 bond issues that raise money for everything from schools to sewers.

The investments are particularly attractive to high-bracket taxpayers. For example, the yield this past week on a 10-year treasury bond was 5.09 percent while a AAA-rated municipal bond offered 4.40 percent. For a taxpayer in the 10-percent bracket, the real interest rate on the T-bill would be 4.58, still better than the tax-exempt bond. But for a taxpayer in the 39.1 percent bracket, the real return on the T-bill is just 3.10, making the municipal bond a higher return.



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