The story is illustrative of the failure of private charities as public institutions.

We've got two sets of dietary restrictions, one of which the Catholics disregard and the other they faithfully apply. This makes their charity functionally inaccessible to the chunk of their neighborhood that's Muslim.

This recalls another common instance in church charities, wherein recipients are pressured into prayer before receiving aid. As many of these charities - particularly in the wake of the Bush 43 era "Faith Based Initiatives" charity privatization initiative - obtain their aid from the federal government, what you have is secular aid filtered through sectarian institutions as a means of cultivating particular ideological views.

What’s wrong with that, exactly?

Set aside the generic legalist "Seperation of Church and State" 1st amendment guidelines, wherein residents aren't obligated to hold religious views in order to access government services.

The fundamental problem with a state sponsored religious charity is that it polarizes the community into economic haves and have-nots, based on religious beliefs. And that foments discord, bigotry, and ultimately violence.