Perhaps their real customer isn't the City of East Bumfuck, Minnesota, but the FBI or ICE or NSA. Though even in that case it seems a bit inept: they need some buyin from the locals to get their cameras installed in the next small town.
If a city wants to exempt ICE, they can. However, if the city has a rogue officer who accesses the Flock search, they can forward the results to their ICE/DHS boyfriend (the claims of a recent firing and lawsuit).
It's quite possible that Flock has different sales contracts, so if a city manager (or whomever signs those contracts) doesn't have a lawyer review the contract or if neither the manager nor lawyer consider data sharing with the Feds to be a concern, then of course my assumptions are off.
But Flock's current PR cycle pins all of the blame for too much data sharing on the customer's permissions settings.