....In determining whether this direct aid violates the Establishment Clause, this court must “ask whether the government acted with the purpose of advancing or inhibiting religion, and . . . whether the aid has the effect of advancing
or inhibiting religion.”
....To analyze whether aid has the effect of advancing or endorsing religion, three criteria are decisive: whether government aid (1) results in governmental indoctrination; (2) defines recipients by reference to religion; or (3) creates excessive entanglement.
....Because the indoctrination and definition criteria indicate that InnerChange had the effect of advancing or endorsing religion during the contract years 2000 to 2004, the direct aid to InnerChange violated the Establishment clauses of the United States and Iowa Constitutions.
Unfortunately, the Court did not outlaw faith-based prison programs, only public funding for them. It seems, in another section of the opinion, to approve of the programs:
In the present case, the district court concluded that the DOC’s purpose in contracting with and funding InnerChange was secular: offering comprehensive programing to inmates and reducing recidivism. This conclusion is well-supported.
The DOC officials were “confronted with the secular, pragmatic needs of running a state prison facility with sufficient programming in a tight budgetary environment.” The DOC officials “considered the long term nature of the InnerChange program, its supportive communal environment, and its extensive post-release care program, as the best indicators that the InnerChange program could reduce recidivism . . . .” In this case, the government did not act with the purpose of advancing or inhibiting religion.
So the aid had the effect of advancing or endorsing religion, and the program had the effect of advancing or endorsing religion, but the state, in allowing the program at its prisons, did not act with the purpose of advancing or endorsing religion.
I think it's a distinction without a difference. The program teaches Christian principles and provides rewards to inmates who participate. That should be enough for it to be considered both a violation of the Establishment clause and discriminatory.