When the government spends money on a Christmas or Hanukah display, it is considered by the law to be an implicit endorsement of Christianity of Judaism. Preventing such a display is not considered abridging free speech because, believe it or not, the government has no right to free speech. The first amendment protects the speech of private entities, and not the state.
If a church wanted to pay for a manger display and was given permission from the mayor or whomever to display it on municipal property, I wonder if that would be considered an implicit endorsement as well. Any lawyers here?