I'm from Europe, and so my views may be colored by my prior experience there. But here's my tuppence:
In Europe we would simply say, "What's the Fuss?" Europeans hold their Christmas Parties and everyone is invited, whatever their beliefs. One reason this does not create a problem is that Christmas parties are not particularly religious, in themselves. For many, Christmas trees and Santa Claus have long been decoupled from religious belief, but allow us to celebrate in a traditional way.
Now, in my past I have been invited to plenty of events stemming from beliefs that have not formed part of my upbringing: Hindu, Shinto, Muslim, Buddhist, Hopi etc. Each time I felt honored to be invited, and did not feel excluded, fully partaking in any ceremonies that I was asked to. So why should non-Christians feel excluded when they are invited to a Christmas party? Exclusion comes from NOT being invited to an event because of what you believe, or, conversely, not attending one when you are invited. So, personally, while, of course, US campuses need to be 'inclusive' and 'diverse', the recent web-site entry from the Office of Diversity seems ridiculous, supercilious arrogance to me. Leave our parties alone! Don't tell us how to have fun!
HOWEVER, though, some words for those local politicians who wish to remove the Chancellor for this, including, as I have read, John J. Duncan, Dolores Gresham and John Bell. It's sad that your primary concern for UT appears to be fighting occasional manifestations of overboard political correctness. You clearly have no interest in judging Jimmy Cheek on his overall contribution to UTK. Instead of spending your time trying to impose your own narrow views on what should be a citadel of free, creative thought, why don't you take an interest in helping us reach the Top 25 Public Universities, or take a lesson from your Governor, and do something to help those kids trapped in terrible poverty, on your door-steps in the Appalachians, get an educational lifeline?