In a small town, officials want to celebrate a holiday by putting religious decorations on city hall. They claim that they are exercising their First Amendment right to worship as they choose. How does this interpretation conflict with the establishment clause?

It conflicts with it because the establishment clause prohibits the state from endorsing a specific religion or choosing it as an official religion of the state or from establishing their own religion. Although they personally have the right to free speech in being religious, they don't have it as representatives of the state because states are secular and have no religion. All people are people of the state, not just those that are related to the majority religion.