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REQUEST FOR COUNCIL ACTION Date: 712912002 Item No: V. $ Department Approval: Manager Approved: Agenda Section: Reports & Recommendations Item Description: Consideration of Issuing Tax-Exempt Bonds for Northwestern College Background State Statute provides for the issuance of tax-exempt bonds by municipalities for the benefit of educational institutions. The bonds are considered conduit debt, and do not constitute a financial obligation in any part by the City. Prior to issuing any tax-exempt bonds, the City has always sought a legal opinion from the City's Bond Counsel to ensure that the authority to issue the bonds is valid in each instance. Northwestern College has requested that the City provide tax-exempt financing for the purposes of funding student housing and the classroom portion of a new media center on the Northwestern College Campus located in Roseville and Arden Hills. An application fee of$10,000 has been submitted to cover the administrative and legal costs incurred by the City. In the past 25 years, the City has provided over 20 institutions with tax-exempt financing. However, this particular request has several unique characteristics that warrant discussion. The major concern in this case is with respect to the City's Bond Counsel of Briggs and Morgan, which is reluctant to issue an unqualified opinion as to the legality of the City issuing tax-exempt financing for Northwestern College. The following is a summary of Bond Counsel's position. The Establishment Clause of the First Amendment of the United States Constitution prohibits governmental entities from establishing a state religion. Conferring a benefit on a religious institution has been interpreted as a violation of the First Amendment under certain circumstances. Bond Counsel is of the opinion that Northwestern College is a religiously affiliated school, which is likely to be considered "pervasively sectarian" by a court. Previous court rulings have stated that any benefit conferred on a "pervasively sectarian" institution works to promote the establishment of religion. The `benefit' is derived from the issuance of tax-exempt fnmeir�g, which provides the institution with lower borrowing costs than could be obtained otherwise. The City's Bond Counsel acknowledges that recent court rulings support the argument that a governmental entity can confer an indirect benefit to an institution even if it is pervasively sectarian, as long as the facilities to be financed are not used for religious purposes. In addition, recent court rulings have provided further support for government participation in `faith-based' education. However, these rulings have dealt with benefits granted to individuals who then applied the aid at a religiously affiliated institution. Because the City would be lending the bond proceeds directly to Northwestern College, the City's Bond Counsel does not think these rulings give it a legal basis to provide an unqualified opinion with respect to the validity of the bonds issued.