Agreed, but that argument is more relevant to argue along the lines of how many in-state vs. out-of-state/international students you can educate. (Even then it's murky -- I can argue the international students both bring additional funding and add diversity which improves the learning experiences of in-state students).

Regardless, the argument here is simply which people they select. Assuming they hold 90% of spots for Texans (required by law), it's just a question of how they select people. The university wants to select the strongest students holistically (which some additional diversification criteria) - the state wants it to select the top 7% of students from every high school. Even if you argue the people are owed a state education, either criterion is a valid way to select the students that attend.