Nope, the city model is actually what determines the 'button' or activation area of selecting a city, so as soon as the cursor goes over any part of the mesh it instantly becomes the 'enter settlement' function.
So to answer your question: you cannot park armies around the city so that they are being constantly clipped by the mesh. You can however have armies clip through the mesh if their path cuts across it in such away or if you have armies enter the city they will walk to the center of the mesh, clipping through it before disapearing, but they do that on the stock cities anyway.
Hope that made sense. Essentially what Im saying is that it causes no real problems or graphical anomalies, the only major one being the faction flag which is now hidden in the mesh, so you cant tell at a glance how many troops are in that city.