Several questions regarding Knowledge Management user criteria.
1) Is it working as designed where the identified User Criteria at the Knowledge base level overrides the article level?
2) How should Knowledge be set-up (i.e., multiple knowledge bases vs. single knowledge base) when there are varying levels of access required?
Knowledge Base user criteria
Select user criteria for an article. You can specify user criteria for an article to control which users can read the article. About this task If an article has no user criteria selected, the article is available to all users who have access to that knowledge
So that's a yes, that's expected.
2) How your knowledge base is set up is based on your business needs If you want a knowledge base that only TSEs use, for example, and another that only Managers use, then make two separate Bases and set the criteria they need on the knowledge bases respectively.