The First Amendment of the Constitution states briefly, "Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof." That ideal has also been enshrined in our civil rights laws which, among other things, forbid discrimination on the basis of religion. This poses a bit of a riddle for President Bush and others who would use public money to fund religious programs. Their idea is to expand Charitable Choice, which would allow churches and other religious organizations to compete for federal dollars. Amy Sherman, a Senior Fellow with the Hudson Institute's Welfare Policy Center, who favors this proposal, says Charitable Choice allows religious programs to apply for government dollars without compromising their religious character.

She says it comes down to simple tolerance:

For example, Charitable Choice allows religious organizations to maintain a religious atmosphere in their facilities so they don't have to take down a cross or a picture of Jesus from their homeless shelter just because they got federal dollars to underwrite some of their activities among the homeless.

Listen: Interview with Bill Smithwick, KBHC President from WHAS Louisville, Kentucky

Opponents say this is a bad idea, even a dangerous one that can promote intolerance. They say the case of Alicia Pedreira versus Kentucky Baptist Homes for Children shows what happens when church and state collide.

Alicia Pedreira lives in a working class neighborhood of one story wood framed houses in Louisville. She has high cheekbones, and a compact, muscular body, sculpted by weight lifting and karate. In fact she's a brown-belt and calls herself a fighter. In 1998 she was interviewed for a job at the Kentucky Baptist Home for Children, which has provided counseling and foster care for children since just after the Civil War. Her first interview went well, but Pedreira is a lesbian, and she wondered if she really belonged in a conservative Southern Baptist organization.

Pedreira said that in her second interview, she told her prospective employers she was a lesbian."I said if that was a problem, don't hire me, I have a job. I even said I don't want to be fired six months from now." Pedreira says she was told to be discreet. "I'm a therapist, I don't usually talk about my private life. I thought, okay, I can work here."

It was, in effect, a "don't ask-don't tell" policy. Kentucky Baptist hired Pedreira to counsel troubled teenage boys, and for six months all went well.

She flips through a large, red notebook, full of documents that chronicle her experience, including her first evaluation - where she received excellent feedback from her supervisor.

The red notebook also contains a copy of a picture that changed her life. A photographer snapped the photo of Pedreira and her partner after an AIDS walk in 1998. In the picture, the two women lean against each other affectionately. Pedreira wears a tee shirt with a map of the "Isle of Lesbos."

The trouble began when the photographer entered the photo in a contest at the Kentucky State Fair, and thousands of people saw it, including her co-workers.

Read: Pedreira writes about her firing from KBHC

She said she didn't think anything of it until someone at work mentioned the shirt she was wearing. Pedreira says, "At that point I went, oh no, and at that moment I pretty much thought that I was going to be fired."

She was right. A week later the President of Kentucky Baptist Homes asked her to resign. A letter explained that her "homosexual lifestyle is contrary to the Home's core values."

Pedreira sued, along with the American Civil Liberties Union, alleging religious discrimination. Under federal law, religious organizations can discriminate in hiring on the basis of religion, but not if they accept government money. Kentucky Baptist Homes receives more than half of its funds from the state, so Pedreira and her advocates say this is an open and shut case.

Matt Coles, a lawyer with the Lesbian-Gay Rights Project of the American Civil Liberties Union says if you want government funding as a religious organization to provide social services, you can't proselytize while you do it. He says the Pedreira case underscores why Charitable Choice is a bad idea:

It's about as stark an example of it as you can possibly find. One of the reasons that we brought this case was because to us it seemed that this was a preview. This is what happens when you let a religious organization provide social services and you don't put restrictions on it.

That's a good position for Smithwick to take because there's no federal law that bans discrimination against homosexuals, and there is no such statute in Kentucky. This case could set an important precedent. Proponents of Charitable Choice say that allowing faith-based groups to hire in a manner consistent with their beliefs, in short, to do what Kentucky Baptist Homes did, is essential and even fair. They point to other ideological organizations. For example, environmental groups wouldn't hire anti-environmentalists. They contend that faith based groups should likewise be free to hire people whose views are consistent with theirs.

This case has divided Kentucky Baptists. Paul Simmons, a liberal Baptist minister, joined the lawsuit as a co-plaintiff. He says in firing Pedreira, Kentucky Baptist Homes used public funds to push a narrow religious-based social agenda.

Simmons also finds it objectionable that President Bush has set up a White House office to fund faith-based initiatives:

The very fact that there is an office in the West Wing of the White House that deals with government initiatives towards faith-based groups is an open assault on the first amendment. This man took an oath to uphold the Constitution, he either does not understand it, or else he is cynical about that oath.

Not surprisingly conservative Baptists have a different view, such as Albert Mohler, President of the Southern Baptist Theological Seminary:

In so far as the Kentucky Baptist Homes for Children are legitimately Baptist and reflect accountability to Baptist churches, the Homes had no choice but to take the action. There can be no doubt that Baptist conviction understands that homosexuality is biblically defined as sinful and as certainly a lifestyle that one would not present to children, especially in the context of a children's home.

Interestingly, some conservative theologians, including Mohler and such prominent Evangelicals as Jerry Falwell and Pat Robertson, agree with liberals about some of the dangers of commingling church and state. Mohler says when churches take government money, they become agents of the secular state, which could dilute their religious message. He believes the government might also insist on auditing their books, or compel them to hire gays.

The best way for Caesar to co-opt the church would be to franchise it, and I'm afraid that this is in a subtle way what is happening. No I do not believe that that is the ambition of the Bush administration. As a matter of fact, I applaud the Bush administration's understanding that Christian churches and other institutions are probably reaching more persons... than any governmental structure or secular alternative.

But I'm concerned as to what will be the inevitable results when all of this lands in the court…I do not believe that there are enough courthouses in America to handle all of the cases, charges, complaints and challenges that will come.