Silkstream,
Are you sure that those pages actually have real penalties or is it algo changes?
Also, when you search your keyword phrases... what sorts of results show up in the SERPs? Does the local 7-pack show up? If so, then your Google+ Local listing would most likely be what would get you to rank for those 'local' terms.
Do you have physical offices in each of the towns represented by the 'category+town' pages ... along with corresponding G+ Local pages for each? If not, you may have difficulty ranking for many towns not close to the epicenter of your actual business address.