I think per-level city abilities are a great idea with a lot of potential.  Unfortunately, they were pushed in towards the end of beta and it shows.  In my view, the problems are:

1. UI: as has been written elsewhere, being forced to choose new city abilities at end-of-turn is annoying, particularly when you can't remember what the plan for your city Resferahahare was and it's hidden behind the enormous popup.
2. The "meh" factor: once the fun of being able to level up cities wears off, you notice that there are only three options (realistically) to pick from and that they all kind of do the same thing.

Here's a quick skeleton of an idea for fixing the UI in a way that lends itself to further expansions.  It's based on how other modern RPGs handle level-ups for characters, which means it has the advantage of presenting this feature in a way that might be familiar to the user.

1. Cities get a new resource, "upgrade points".  One upgrade point is acquired whenever a city levels.  Cities with unspent upgrade points get a highly visible marker on the map (like the "!" for new resources).
2. When a city has unspent upgrade points, the player can choose (from the Actions menu) to view the available upgrades and purchase one or more of them.

The core point: you can come back and pick your upgrades whenever you want.  Most recent RPGs that I've played do something similar when a character levels: when you're ready, you click on a button to improve the character's attributes and purchase new skills/talents/feats (whatever the game calls them).

The other interesting idea would be to provide many more abilities to purchase, and possibly to arrange them in a skill tree like you find in other RPGs.  Aside from the obvious resource production modifiers (why can't I boost Prestige/Metal/Food/etc?), here are a few less "generic" ones, off the top of my head.  Just throwing a few notions around to try to expand the playing field of what we can do with city abilities:

1. Sprawl: Increase the number of available tiles
2. Medical Center: Units in the city get an extra bonus to healing / HP
3. Defensive Patrols: Enemy units in the city's influence move at half their usual speed
4. Mandate of the Sovereign: the player can choose to spend extra Gildar to make a particular unit build substantially faster (say, twice as fast).  Maybe have the newly built unit come out somewhat below-par (level -1, heh) to represent their rushed status and lack of training.
5. Trade Hub: all trade routes to/from the city produce an extra 10%
6. Caravan Permits: more caravans can be built in the city (this one could be multi-level)
7. Caravan Guards: free units are included in each caravan sent from the city, they become more powerful the more points you put into this.
8. Diplomatic Outreach: for each unit of another faction within the city's influence, improves relations with that faction by some amount per turn. (I like this idea, but the mechanics may be a little too obscure in a game already full of obscure mechanics)
9. Resource Hunters: the city can build special units that are capable of claiming resources outside the kingdom's boundaries.
10. Navigation Center: ships built in the city have more moves per turn and better vision.
11. ...?

Obviously all of these could be buildings, but then so could the current bonuses for leveling.  I think the extra locus of customization is fun, and it would be nice to see some really unique abilities that we could purchase this way.  I especially like having a few activated abilities (like the rush-build), although too many would probably become annoying.

I think it would also be fun to have a tech tree and a few associated high-level buildings that let you get extra skill points in a settlement (maybe with "governmental" names, like Administrative Center).  Also, maybe level 5 cities could continue to get skill points (say, by accumulating prestige), with a diminishing rate of return, similar to the infinite research trees.