What do you use those mercenary troops for if you don't declare war on factions other than rebels? My contrarian opinion is that playing under those rules, mercenaries are too expensive to maintain and should be dropped. This is coming from Mister Mercenary horde himself.

You can defeat any rebel settlement quite easily with a single full stack of spearmen laying seige.

The cheaper method might be using spies and assassins to reduce the public order, causing a rebellion, and claiming the city yourself. Plus pillaging florins.

But, go with what works, I say. If it is working for you, it can't be that bad.