In the case of New York v. Cathedral Academy in 1977, the Supreme Court ruled that a New York law allowing non-public schools to be reimbursed for state-mandated record keeping and testing was unconstitutional. The court held that this violated the Establishment Clause of the First Amendment which prohibits government aid to religious institutions. The decision hinged on whether or not providing such reimbursements constituted "excessive entanglement" between church and state, with the majority opinion stating it did due to its potential for political divisiveness along religious lines and increased government surveillance over these private institutions. This ruling further solidified legal precedent regarding separation of church and state in matters of education funding.

In the dissenting opinion for New York v. Cathedral Academy, Justice William Rehnquist argued that the majority's decision was inconsistent with previous rulings and unnecessarily broadened the interpretation of "retroactivity." He contended that a law should only be considered retroactive if it attaches new legal consequences to events completed before its enactment. The tuition reimbursement statute in question, he believed, did not meet this criteria as it merely provided a subsidy for educational services rendered during a specific time period. Furthermore, he disagreed with the majority's view on separation of church and state issues; while acknowledging potential concerns about government funding religious institutions, he felt these were irrelevant to determining whether or not the statute was retroactive. In his view, any First Amendment issues could have been addressed separately without impacting their judgment on this aspect of the case.