I've long been puzzled by state support for elite universities. In contrast, I've long been puzzled by the lack of state support for community colleges. So what's the puzzle?
To make sense to an economist, states should support goods and services that private markets don't adequately provide and where the benefits accrue primarily to the state. In other words, they should be local public goods.
That may have been true for elite state schools at one point in time. Nowadays, however, they recruit out-state and their graduates enter a national job market. That's not as true for second-tier schools, and not at all true for community colleges.
The Center on Budget and Policy Priorities provides data on dramatic changes in state funding to higher education. Many things drive this; obviously the timing reflects a stringent fiscal environment. In addition, the data don't indicate how these changes are split among tiers in the education system – elite schools, second-tier 4-year schools and community colleges. The latter ought to be the priority, because benefits are local, from both the student end and from the employer end. However, at least in Virginia [mea culpa: my wife teaches in the VCCS] elite schools have alumni lobbying networks (and sports programs that enhance visibility) – Virginia Military Institute, physically adjacent to my own W&L, is an example. The community college system has neither (though in some locations employers may raise their "voice".
Now some "flagship" schools are almost private; the University of Michigan is one such, and the University of Virginia is moving in that direction; both seek to be "national" university. Cause or effect? – in any case, I don't find the diminished state role inappropriate. However, I fear that all are painted with the same broad brush strokes, though the decimation of lower-tier institutions in California is what dominates my thinking. I don't research education, so this is primarily a thought piece, but one hypothesizing on the basis of data. I'll post further as I learn more.