Photoshop grays out menu items when the option is not currently available for some reason. For example here are two screen captures A new document 800x800 white background. Note how menu items like free transform are grayed out because the background layer does not support transparency so the Background layers transparency lock makes free transform unavailable.
Not now converting the background layer to a normal unlocks the layers transparency and now Free Transform is available for use
I was able to use the duplicate layer feature to be able to access the transform tool so I found a round about way around the problem in the mean time; however, I still don't know how to change the transparency on the background layer to be able to access the transform and other tools.
You convert a background layer to a normal layer. The one and only optional Background layer does not support Transparency A Background layer transparency is always locked.
There are several way to convert a background to a normal layer. A double click on it in the layers palette. A right click option in the layers palette to convert to smart object. Newer versions of Photoshop will automatically convert it if you click add a layer mask. In the layers palette when the background layer is the target.