The Minneapolis-St. Paul Star Tribune has an article that does a really good job at illustrating the pitfalls involved when it comes to using faith-based programs to provide social services.
Apparently, a conservative Lutheran church that was receiving money from their local county to provide hot lunches and other services to disabled and vulnerable adults turned away a potential client because the client was a post-surgery male to female transexual. The county, as a result, will no longer refer clients to the church program, and the church is now loosing money.
In this case, funding the faith-based group led to a lose-lose situation. The county needs to find (and fund) other resources to take up the slack, and the church program is now running with a massive deficit. There are really no winners here.
Something that is worth noting is that this situation illustrates how the first ammendment protects religion from the government. When a church takes money from the government, the government gains leverage over that church. Strings can be attached to the funding, and the funding can be cut if the church is unwilling to subordinate its beliefs to those of the government.
The government, on the other hand, cannot fund organizations that are not willing to provide services to everyone that the government believes is entitled to those services. If a transexual is entitled to government services, then the government has an obligation to provide those services. The government should not have to select the contractor that is the best religious fit for the client - that forces government employees to make religious decisions, and it makes the whole process less efficient.
This does not mean that religious groups should not be able to receive money to fund social service programs. That's been going on for much, much longer than Bush's faith-based initiatives thing. What it means is that any religious group that wishes to receive funding has to take the funding with the strings attached, and provide services without regard to how well the client fits their worldview.
The organization that I used to work for, Bronx Jewish Community Council, has provided a number of government funded services to the poor and elderly for decades now. They can receive the government funding because they do not discriminate. Clients are accepted based only on two factors: the need of the client, and the availability of the services. Nothing else matters. I used to joke around about being a token goy on the staff, but the hiring is actually totally nondiscriminatory (with the possible exception of an off-the-books insanity requirement). The only concession that the government made to the religious sponsorship of the agency was permitting the agency to close on jewish holidays - but only if the agency was open on an equal number of secular holidays.
Those types of government funded religious programs do good work, and have been around for ages. Providing money to those groups is not what the "faith-based" funding initiatives are about. Those involve funding groups who are unwilling, for religious reasons, to meet the non-discrimination standards expected of the government. That's an end run around the Constitution.
(Minor editorializing here: the most legally appropriate action the county could have taken under the circumstances would have been to pull all funding and clients from that church. The county claims that they did not do so because they were concerned about the possible effects on the clients already enrolled. I'm usually a hardliner on separation of church and state issues, but in this case I think the county made the right call. I've done a little work in social services in the past, and disruption can have big effects, particularly on seniors.)
(Additional editorializing: Jesus ate with prostitutes and tax collectors, but those schmucks won't feed a transexual. That's real Christian of them, isn't it.)
Hat tip: PZ Myers