There are 2 separate algorithms:
1 removes inactive towns
1 moves active towns to new locations
The discussion here is mainly about the second one, while your problem has to do with the first.
And yes the first one is not fully operational to the functionality that Inno is envisioning. Small towns that don´t get deleted usually are the ones that have bought diamonds. Eventually they are supposed to be put into storage, but so far that is not working. Same is true for big inactive cities. The only part that is actually working is the part that is removing small, non-diamond, inactive cities