I agree that if the profs you want to work with at school1 were what you were looking for then not to let the entire faculty of the deparment sway you too much (assuming they're taking students and are interested in letting you rotate). Every large group of people has a few that are going to rub some one the wrong way.
One of the more nebulous possibilities that I'm just speculating on here... but if it's a prestigious school that's well funded means that the research is active and very good, resulting in more funding, and better rankings for the department. Profs don't do the dirty work on research, but it still consumes a lof of their time, combined with teaching responsibilities, paper writing/editing, and most painful is grant writing for them. Add that to the standard deparment business, and recruitment/interviews and the unfortunate situation is that many of the profs really are swamped.
Part of the decision for ya sounds geographic too, public transit is really handy (and helps save money). I'm in nyc, and the money I save from not paying $100 a month on gas, $100 a month on insurance, car upkeep, parking permit, etc really helps offset the cost of living difference between big city and small city where I needed a car. If you can live where you don't need to commute to work is an even bigger time/money saver for you.
Also there's a huge difference between students seem "a little less happy" and something like unhappy, lacking all joy, miserable, lacking a will to live, I think you see where I'm going with that. A little less happy is not bad compared to not able to find a lab that can afford to keep a student, or a department unable to support students. See if the better funded department has any other benefits such as a travel allowance that is not offered by school2.
Either way, you're in a better situation than others having two offers and having to make a choice. Congratulations, and g'luck!