They're doing that because it's the only leverage they have, because of our screwed-up system. In a more just world, the kind of "pay me $1 billion" stuff that Trump is doing to UCLA would instead be done tenfold to the most elite institutions to force them to entirely remake their operations on a more equitable footing.
The state isn't pulling subsidies for the school to beautify its campus or some such.
It is canceling financial aid grants to low income students that are accepted to Stanford.
This is presented as a punishment of Stanford, which has no shortage of applicants.