Yes, the stadium's too small, and the threat of gambling influencing the outcome of the game, and the thought of losing a mascot to an arrest for solicitation of a prostitute does seem more troubling than it should. (Remember: not legal in the city, lascivious mascots of the Pac-10. I'm not talking to anyone in particular.)
There is a long list of potential sites for a Pac-10 championship game.
Phoenix (Glendale), Los Angeles, Seattle, San Francisco, Oakland, and San Diego all have their resume points. Glendale's stadium is first-class, the Coliseum and Rose Bowl in LA are marquee college football stages; San Diego and San Francisco are already tourist destinations, and Oakland is a thrilling theme park ride for the whole family. Seattle is a great choice for the conference if they want to avoid direct sunlight at all costs.
None of them burst with the pure tacky potential, ample hotel rooms, and abundant ruckus a championship game in Las Vegas offers. Obstacles aside, you don't think the conference that proposed eating half of college football to make the Pac-16 wouldn't leap at the opportunity to make this happen? Commissioner Larry Scott is all about pushing the Pac-10 into the "postmodern" era of college athletics, and nothing would be more postmodern than playing the conference title game in the shadow of the simulacra of the Eiffel Tower, New York City, and the Pyramid of Cheops.
(It's no Indianapolis, but few places. are, really.)