...I can't imagine what they were thinking, and I can't think of what would anger me more: 1. the fact that they would try to emotionally manipulate me in front of my kids to extort money from me (little slips of paper under the paintings, someone else bidding on my kid's artwork, etc., etc.,) 2. the fact that they would hold this 'special' event DURING my kids' nap times (this, from a daycare provider who supposedly knows children!), or 3. the fact said 'special event' would entail keeping kids in an inadequate play area and that they would display treats, like cupcakes, and withhold them from the children for so long.
I would be livid as well (not to mention enraged and offended), and I think you are completely justified in every single one of your points. I'm absolutely dumbfounded at what appears to be a toxic combination of greed, stupidity, poor judgment, thoughtlessness and inconsideration. Stick to your guns about not buying your kids' artwork (unless it's at a price you are comfortable with) -- don't buy the jacked-up rate of $20+ (that would make me practically insane with anger--you are right, someone else bidding on my kid's artwork? Puh-lease).
I'm also with you on the charities. Years ago, when I was in my 20s and working at a local TV station, I remember the exact same United Way m.o. (employees got slips asking if they wanted to contribute OR request a deduction from their paycheck. Uh, you forgot option 3: NEITHER -- and I, too, just pitched the paper. I'm sure you well know that the United Way CEO makes a huge salary -- more in one year than I would probably make in five or 10! But this is your rant...)
I don't have any good advice, except to say that I'd write or talk to the daycare and start off by saying all the great things you said here: they are like a family for your boys, etc., and then I would say that's why it makes their recent action doubly surprising, upsetting, disappointing, etc. -- if they'd asked for a donation or let you know in advance, it would be one thing, etc., etc. I think the others have already addressed this well, so I won't belabor it -- just mostly wanted to let you know that I agree with you 100% on everything you expressed, and I hope you're able to find resolution that doesn't make you feel compromised or extorted, because I know that great daycare providers are not easy to find.