If the performers are not in costume, how would you describe their attire?

If you change the name you put the protestors in a corner where they'd have to concede the concept of a guy in a dress is the issue, not any association with the drag scene. People on both sides of the issue think drag is adult entertainment; you avoid that issue by calling it something else while still having the same people do story time. And you can have additional volunteers come in costume and read to the kids too if they wish.

So do you think there's a chance he'll resign? Or will the temptation to further the grift win out?

Just rename it Costume Story Hour and call it a day.