"The paramount goal is compassionate results, and private and charitable groups, including religious ones, should have the fullest opportunity permitted by law to compete on a level playing field, so long as they achieve valid public purposes, like curbing crime, conquering addiction, strengthening families, and overcoming poverty."- President George W. Bush
Many are going to take a Secular versus Religious outlook on this but I won't. In fact I'll begin by eliminating that factor from my point of view with my own statement:
I do not believe that giving Federal Money to a Mormon organization to help someone get off a meth addiction is the same thing as an establishment of religion.
That said I don't think anyone should be 'competing' for Federal dollars. I've seen first hand what this does to schools and I can tell you that it doesn't improve anything, but rather makes it worse. I know you think this is the Libertarian in me speaking but it's not. It is the common sense part of me talking. (not to say that being a libertarian isn't common sense...in many ways it is but I digress)
Too many times when Federal money is sought after there are rules that must go along with it. Not just the rules but also the infrastructure necessary to qualify for the Federal funds to begin with. Trust me on this one. I won't disclose what I do for a living but I can tell you that I see state agency budgets everyday. Even though I am not a public employee, I know what it is to work in the real world and then see a snapshot of what substitutes for logic once an agency is spending public funds.
Government money is taken by force. Behind this force is a bureau of administrators. By contrast behind almost every Faith-Based organization are people who give their time, resources and talents to help people knowing that the task is greater than themselves.
Another distinction is worthy of note: A faith-based organization is free to exercise their faith and their own polity. That's a fancy way of saying that if they want to give a ten minute sermon before they serve soup and sandwiches then they may. I'm here to tell you that is in jeopardy once Federal funds enter the mix. You will be told that it will not, but logically it must.
Good charities don't need more money, generally they need more volunteers. I have several charities and Organizations that I routinely give money and time to. It is my freedom to do so. I'm not motivated by a fear of the afterlife but instead a grace that enables me to do it purely in love. There is no force involved and because of that I believe it makes a difference.
I think all Faith-Based organizations should just take the Hillsdale College approach and say "Thanks, but no thanks" to Federal Money.