it's a catch 22 situation; if the church and state are seperate - then the state has no validation to *NOT* give the religious groups money if all other things are equal with competing or similar groups.

Seperation of church and state *should* take whether or not the group has a religious affiliation out of the equation. Likewise seperation of church and state should mean that the state can make NO rulings regarding religion.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;