President-elect Obama has promised to build on the faith-based initiative of President Bush and, by adding key reforms, to make it “the foundation of a new project of American renewal.” But to do that, his administration will need to resolve constitutional and other tangles that have made Mr. Bush’s effort so controversial.

If Mr. Obama succeeds, an initiative that at times has provoked sharp division over how best to provide needy people with social services could become, rather, a unifying force in helping to address needs amid a period of severe economic duress. Faith-based groups, after all, won the most kudos for effectiveness from survivors of hurricane Katrina, and they are helping thousands now during the economy’s travails

“It’s important for the new administration to say, ‘We are going to reconcile two fundamental values: our commitment to meet pressing needs and to respect constitutional guarantees [preventing government establishment of religion],’ ” says Melissa Rogers, coauthor of a Brookings Institution report that recommends “a new path” for the endeavor.

Tackling the church-state issue head on, the Obama transition team has engaged a large advisory committee – involving people with differing perspectives on the most contentious issues – to help it design a government-neighborhood partnership.

The broad outreach “is a matter of great credit to [Obama],” says Stanley Carlson-Thies, who served in the Bush faith-based office and is participating in the discussions.

For eight years, the Bush administration sought to open the door wide to funding religious groups that offer social services of all kinds – among them job training, drug treatment, prisoner reentry, and after-school programs. It brought unprecedented visibility to their efforts and boosted the number funded by federal programs. (Overall federal funding for social services decreased under Bush.)

But the administration also pushed the envelope in ways found to be unconstitutional – such as funding groups that included religious elements in their social-service programming, a practice the courts have generally rejected. The US Department of Health and Human Services, for example, had to stop funding the Silver Ring Thing, a sexual-abstinence program for high-school students, after a lawsuit challenged its Christian content.

The most controversial issue is whether religious groups should be allowed to hire only people of their own faith as staff in federally funded projects. Some in Congress and other critics insist that groups should not be allowed to engage in such selective hiring, calling it discrimination. The debate became so intense that Congress never approved specific legislation for the faith-based initiative, and the Bush administration implemented it largely by executive orders.

Last week, in a last-minute gift to its religious constituency, the Bush administration, citing a legal opinion from the Justice Department, issued guidelines for prospective grantees on how to gain exemption from laws that specifically prohibit religious hiring.

“The administration has fought for this with every possible tool at its disposal ”¦,” said Ira Lupu, a legal expert on the initiative, in a Dec. 2 session of the Roundtable on Religion and Social Welfare Policy.

Obama, in announcing his own plan in July to reform the faith-based initiative, included among his principles: “If you get a federal grant, you can’t use that grant money to proselytize to the people you help, and you can’t discriminate against them – or against the people you hire – on the basis of their religion.”

Yet the hiring issue is complicated. Some federal laws in fact allow religious discrimination in hiring, some prohibit it, and some are silent on the question.

Many faith-based groups say it’s essential that they retain their religious identity and standards, and that staffing is key to that. They insist it is no different than congressional leaders selecting staff on the basis of political affinity or environmental groups selecting staff on the basis of a commitment to “green” principles.

Critics say that it’s unfair to taxpayers, whose funds are involved, to be ineligible for the available jobs and that religious groups provide services for government that the government considers secular.

“Government only funds tasks that are nonreligious in nature. It is not giving funds to advance someone’s religious mission,” says Ms. Rogers, director of the Center for Religion and Public Affairs at Wake Forest University Divinity School in Winston-Salem, N.C.

For many, however, this issue could be a deal-breaker.

“Hundreds of faith-based groups do the same work as secular groups, and they draw donors because they are religious. To say that because they serve everyone they can no longer be considered religious is pernicious ”¦ and will cause chaos out there,” says Dr. Carlson-Thies, director of social policy for the Center for Public Justice.

They point to groups with longtime government grants or contracts, such as the Salvation Army and Catholic Charities, that take religion into account in hiring. “Maybe in an economic crisis, when calling for all hands on deck, it’s not the best thing to pass a ban and discover the fallout later,” Carlson-Thies adds.

On the hiring issue, the Obama team is likely to be cautious regarding changes, says Mr. Lupu, a law professor at George Washington University in Washington.

Obama’s initial plan proposed setting up a Council for Faith-Based and Neighborhood Partnerships, maintaining 12 federal offices that promote the initiative, partnering with states and cities, and strengthening evaluation to ensure that only constitutional programs are funded.

The Brookings report, by Rogers and senior fellow E.J. Dionne, presents 16 recommendations. They include better guidance on the prohibition of religious programming, strengthening religious-liberty rights of program beneficiaries, better monitoring of church-state safeguards, and making it easier for houses of worship to form separate nonprofit organizations to run their federal grants and thus keep government out of church business.

Despite ongoing tension over church-state concerns, most people agree the Bush years have moved the goal posts on federal funding of faith-based groups. Court rulings of recent decades have enabled that to occur. Forms of indirect funding, such as vouchers, for example, have been allowed in drug treatment, day care, and other programs. They permit beneficiaries to choose any service, secular or faith-based. “I hope the Obama administration will consider that ”¦ it’s been accepted by the courts and shown its promise,” says Carlson-Thies.

The president-elect has set the tone by welcoming federal partnerships with religious and secular groups. He’s involved people on the right and the left in the planning process. Many are now waiting to see how high a priority he will give the initiative in meeting the mushrooming needs of the economic downturn.