Clinics, State Funding and the Piper

From Sid Shapiro at Wake Forest comes news of a threat to cut state funding to the University of Maryland's Law School in response to the UM environmental law clinic's lawsuit against Perdue Farms (the chicken producer) and a Maryland chicken farmer. 

My initial sympthaties are certainly with the law school, for the reasons that most of us can probably immediately think of.  But I'm wondering if anyone out there is willing to defend the proposition that the state has a right to control decisions such as who a state law school clinic represents, because of political or public policy concerns about the lawsuit. 

I suppose I'm interested in questions about constitutional doctrine, in particular the applicability of Rust, Velazquez and Finley, but I'm really more curious about people's deeper sense of who should prevail, and why.  Should there be limits to the idea that once a legislature gives money to a law school, it has to keep a hands-off attitude about what it does with it (assuming, let's say, that there's no question of fraud or blatant misuse)?  Let's say a farm state wants State U. to have a farmer's rights clinic; can it threaten the school with a funding cut if it establishes some other type of clinic instead? (I understand that a legislature can simply appropriate money explicitly for the purpose of establishing a particular clinic, but in a way that fact just restates the problem: should Maryland here be able legitimately to fund the school next year with a proviso that no money shall be spent on the Perdue lawsuit?)  Is that worse than a state saying, "you can have your environmental law clinic, just don't sue small polluters (who are economically fragile in the current economy)?"  Or big polluters (who are sources of lots of jobs)?  Or is the State U. example less problematic, since there's legislative interference in the set-up of the program, but (let's assume) a hands-off approach with regard to how the program operates once it's set up?

What about other decisions?  Should a state be able to insist that the law school make certain choices about curriculum, hiring or admissions, in pursuit of some broader public policy? Obviously, an issue like that takes us far beyond the question of the state pressuing the school over a clinic's choice of a particular client or defendant.  Even there, though, I wonder how that cuts -- is Maryland's action here more defensible than seeking to influence more basic decisions about curriculum, etc, on the theory that client- and case-selection is, we can assume, something of a detail?  Or is client- and case-selection so bound up in the lawyer-client relationship (at least de facto if not formally) that there's something especially troubling about the state's decision to interfere in such functions?  Or is what's critical the fact that the lawyer-client relationship already exists, and it's a real problem when the state's funding of legal repesentation is now pulled?

It's easy to multiply the examples and the resulting questions.  But I think this states the basic idea.  What do people think?