The government should be neutral when it comes to matters of faith in government-sponsored events and activities, not acknowledging (favoring) one faith over another and not avoiding (banning) religious expression on the part of its citizens all together. The government–at all levels–is best when it embraces an accommodation view, in which it seeks to "accommodate" individuals' rights to express religious beliefs in government locales.
The Supreme Court has held that public schools may teach students about the Bible if the teaching is "presented objectively as part of a secular program of education" [School District of Abington Township v. Schempp, 374 U.S. 203, 225 (1963). Stone v. Graham, 449 U.S. 39, 42 (1980)]
It is virtually impossible to teach a course about the Bible in a public school context-particularly when the students are minors-and be objective and fair. Objectivity, neutrality, balance and fairness are surprisingly subjective when applied to biblical narratives such as the resurrection of Jesus. This is the central event in Christian belief and no less an authority than the Apostle Paul declared the truth claims of the Christian faith dependent on the reality of the resurrection of Christ (I Cor. 15:17).
How do you approach such an astounding supernatural claim in a way that is non-judgmental and balanced and fair"?
Those who believe in Jesus' resurrection will not see an approach to teaching the Bible that challenges its truthfulness as either "objective" or "neutral." And those who believe the resurrection is a story or a myth will find any suggestions it might be credible unacceptable in public schools. This "truth claim" problem permeates the Gospels. Such claims do not lend themselves to "objective" and "neutral" treatment.
The overwhelming temptation of school districts will be to adopt a neutral model that will assume the Bible to be merely a book of historical significance and that will attempt to give "realistic" explanations of the supernatural events in the Bible.
Such a model would be neither "objective" nor "neutral."
In the end, it is not a matter of whether or not the Bible can be taught in a public school setting as literature or history, but are Bible-believing Christians willing to set aside the supernatural nature of God's Word simply for the sake of having an Bible course in a school?
I discussed this topic recently in a question and answer session with pastors in Richmond, Va.
For more information, read my article The Bible in Public Schools: A fatally flawed guide online.
While this is not an endorsement of this document, the Clinton Administration released a helpful document, Religious Expression in the Public Schools, on this topic in 1995.