Is there a happy medium that could include both the navigation and architecture you want but also keep a decent portion of the old content? Have you ran any split testing to gauge how well people react with the new design versus the old design? Do you have current conversion rate numbers on "service city" for your site? If this keyword went away 100% how would that affect business?
Modernizing a site usually is a benefit, and it sounds like you have the right mindset in place for considering what you want to do accomplish by doing so, along with what you want to keep in terms of past ranking success. Perhaps take the time to also run a campaign around the redesign to gain a burst of press and links around the changes as well as still providing the same service in the same city that got you to second in the first place. Cheers!