Your answer is so off-base that it's not even wrong, it's simply irrelevant, but here goes my attempt to address some of your inaccuracies.
It really is. There is no "separation of church and state". There is "not making laws banning or establishing the practice of religion."
For individuals versed in the First Amendment, and religious rights jurisprudence, both the Establishment Clause and the Free Exercise Clause are understood to provide the substantive basis for the concept of "separation of church and state" (SoCaS). The two are the same thing. What you mean to say is that SoCaS does not mandate a complete division between state action and any religious entity.
Lately, there has been the legal position that a more recent Constitutional amendment forbids states from engaging in practices forbidden to the Federal government (the Incorporation argument). This has a strange impact of invalidating state laws entirely, and of twisting the Tenth Amendment.
Unless you live in the 19th Century, this concept is not a legal position that has come about 'lately'. It has, in fact, been repeatedly upheld by generations of the SCOTUS, and doctrinally the concept of incorporation has existed for over a century. In the past decade, every sitting justice has penned, or joined in an opinion that explicitly relies on incorporation in some way, and it cannot be maintained that the notion is either a recent development, or not broadly accepted.
It certainly interacts with the 10th Amendment, but the Constitution is abound with interactions between and among its several clauses. Understanding these interactions, as opposed to suggesting that they cannot occur, is required for any sort of meaningful understanding of the law.
In the Incorporation interpretation, it would be patently illegal for the state to *refuse* to fund such a thing based on it being a religious artifact; the baseless assertion of an imaginary separation of church and state, interestingly enough, would also demand that the state not take a stance *against* religion in this way.
No, as this is equating any religious activity that seeks public funding as necessary to the free exercise of that religion, which has never been held to be the case. Your faith may require you to build a rocket ship out of elephant tusks and diamonds, but that doesn't mean the state is obligated to fund such an endeavor. This example just fails to parse either of the 1st Amendment religious rights in any meaningful manner.
Apparently, it is a hard concept to grasp.
On this point we are in complete agreement. You have vividly demonstrated what it looks like for an individual to lack any substantive understanding of incorporation, or religious rights, state action, or separation of church and state, whatsoever. I agree it's complicated, non-intuitive, and easy to get wrong, just as you have done here.
(the quick and dirty as to why this isn't unconstitutional is because the issuance of a municipal bond basically allows an electorate to vote with their dollars as to whether they wish to fund a project of some kind. The issuance of the bond is not considered an entanglement running afoul of the Establishment Clause because the funding is ultimately sourced from private investors. Religious rights jurisprudence is already a doctrinal mess, and we don't need you getting it so wrong.)