Public University Funding of Religious Student Groups

A couple of days ago, Rick posted a report of a dipute in California over funding the activities of a religious student organization that selected members or officers on the basis of religious and secual orientation.  To expand the subject a bit: the Associated Press reported the other day about a controversy over whether the University of Wisconsin-Madison should allow a Catholic student group to use student fees for religious purposes.  The chancellor takes the position that allowing the student group to use any university funding for religious purposes (e.g. printing Lenten booklets) would violate the First Amendment.  The Cathlic group (which "serves the university's estimated 12,000 Catholic students, faculty and staff") argues that scholls must disburse funds without regard to ideology or viewpoint and that withholding funds would amount to discrimination on the basis of religion.

I'm not a Constitutionl Law scholar and would be interested in hearing anyone's view on the arguments being made here.