You're right to an extent (the news cannot be free as in beer), but the nation-wide non-profit online only experiment that I was referring to is really more aimed at the kind of reporting you are talking about. See: The Voice of San Diego, The MinnPost, and The St. Louis Beacon for examples. Non-profit, local newspapers going 100% online and depending on their communities for support (with maybe some ad sales on the side). All of them are doing hard news coverage and in some cases are doing it better than their city's major daily paper.
Also, your local NPR station has long operated on the model that you just described, providing the kind of coverage that you've described.
The model may not yet be proven for "print" but it is certainly being tested, and seems to be holding up pretty well.