I'm not sure if universities should have their funding cut but libraries seem very foolish to keep funding. Wouldn't it be better to invest all the money currently spent on libraries in to an online library? Imagine the amount of information we could have easy access to?
The top story on Hacker News right now, http://news.ycombinator.com/item?id=3607217 (also the link I start the post with), explains one of the problems with doing that. As many important functions move online, the library is one place someone without a computer and computer skills can use to gain access to the online world.
Libraries also provide a meeting place for the community, access to librarians, and many free classes.
I do agree it makes less sense now for libraries to have large physical collections. The shift to an online library seems inevitable there. But access to this from local libraries is still important.
