I realize this thread is a couple years old, but feel it's still a relevant topic. Also, insofar as there are two issues at play here, let me say I agree with Chris' assessment about client relations.
I also do SEO for service-area businesses, and have been working on localized landing pages for a few of my clients. I am not attempting to optimize for locations across state lines.
I've read the Google documentation and the forums at Webmaster Tools, and posts here on Moz, and I'm still unclear. I have two relevant examples of recent work I'd like people to weigh in on if possible... In both cases my list of places/ZIPs is prominently placed, nicely formatted, and (i think) useful for users.
Case 1: A service area page for a company that only serves NW Ohio. Below the fold is a section
Counties & ZIPs We Serve. Then a list of the counties, below each county is a list of the ZIPs in that county the company goes to. It's a construction contracting company that has a specific geographic range, and so we felt it would be best to be specific, so clients could find their County & ZIP before contacting. Is this KW stuffing to Google?
Case 2: For a page targeting a larger city that is known for valuing it's local neighborhoods and independent local business, I have a list of neighborhoods within the city that we're targeting with a note to readers, 'find your neighborhood...' Is this KW stuffing to Google?
Thanks in advance