I thought that part was interesting as well, and it's a seriously hard problem. I am aware of one institution making that hard choice, though: the College of William and Mary. Sometime before I arrived there in 2003 for grad school, they had eliminated graduate departments that the school felt could not become top-ranked in their area.
Seems to me that a major state university should aim to provide its students with a broad range of fields. Not being able to study German at a public school seems absurd.
