Direct government funding was provided because public broadcasting is still the most cost-effective way to provide service to underserved areas that have been abandoned by commercial broadcasters due to low population density, and have no cellphone coverage for the same reason.
You're exactly right. Every year CPB produces a report listing hundreds of specific examples of what you're talking about. The members of congress get this report. It is used to justify the federal appropriation. They all know what they did was wrong. They all know what they did will hurt their home states and their constituents. They voted for it anyway. They will face the voters next year about that.
The fact of the matter is that the situation that led to the public broadcasting act of 1967 still exists. It exists in broadcasting. It exists in cable. It exists in digital media. Having lots of other media doesn't mean that any of it will benefit the people when they need help.