I don't think this ever happened, but it's not impossible.
Imagine a genteel southern city in the 1950's.
A local Christian association has a long history of works of “charity.” What started out as a simple soup kitchen run from a church basement has long since developed into an array of programs in education, child care, job training, health and provisions for the needy. Since these services spare the government the burden of creating and administering new structures, the city approved an annual grant for a number of programs (in effect, off-loading to the church group some of the social services the city would otherwise have had to provide directly). At a certain point, however, the city fathers (weren't they all “fathers” back then?) felt that the times called for certain measures to protect the fabric of society. In the name of propriety and good civic order, the city council passed a bill mandating agencies in any kind of contractual relationship with the city to maintain racially segregated offices for their employees. Although the bill's name gave a nod to “religious freedom,” it did not include an exemption for religious organizations and individuals whose rights and beliefs might be compromised by observance of the new requirement.
Following passage of the bill, the church association sorrowfully announced a reduction of hours and programs in their service arms. Conforming to the city's stipulations, the official statement said, would imply acceptance of racism as a principle. This was contrary to their identity as an organization. With segregated offices a condition of city funding, they could no longer qualify for the grant that had supported many of their good works.
Mystified by the group's intransigence over an issue so (seemingly) peripheral to health, education and poverty, the city fathers sputtered about religious narrow-mindedness and about silly “philosophical differences” that shouldn't enter into the discussion. In their pique, they even accused the organization of holding the city hostage to arcane theological doctrines.
No, this probably didn't happen. At least, not in those exact terms.
Instead of a genteel southern city, think of Washington, DC. The social services (physical and mental health care, legal care, immigration, employment, counseling, shelter, education, foster care and services for the developmentally disabled) are provided by Catholic Charities of the Archdiocese of Washington. The bill in question is the “Religious Freedom and Marriage Equality Amendment Act.” The stipulations of this gay marriage law bind any person or entity in a contractual relationship with the city. Failure to conform to all the requirements of the law leave one open to penalties and lawsuits. Despite its name, the bill includes only the narrowest provisions for religious freedom, limited to a short list of specific circumstances. Even the ACLU has weighed in to urge greater protection for religious freedom, in accord with federal law.
The Archdiocese of Washington is not a social service organization; it is a Church that expresses its identity in a vibrant way through its many social ministries. But that identity is a complete package: the “Catholic” in “Catholic Charities” means something! The District of Columbia is free to withhold funding for organizations whose character doesn't meet city criteria. People still need help. If Catholic Charities can no longer meet city criteria for contractual services, there is little that can be done other than regroup and try to find ways to do as much as possible with significantly fewer resources.
This post was originally written for the Chicago Tribune religion blog: http://newsblogs.chicagotribune.com/religion_theseeker/
For more information, please see the Archdiocese of Washington's news page: http://www.adw.org/news/News.asp?ID=702&Year=2009