It sounds like they recognize that the manager will work an extraordinary amount of overtime and they over time off to compensate. That being said, they don't seem to want taking that time to get in the way of getting the job done and may also have concerns about the way the use of compensatory time is managed.

I have similar language in my agreement (at least the first paragraph) and in previous agreements. However, I have always recognized that I would never be able to take time off in a maner that approximates my extra hours worked.

I normally consider comp time within the week it is earned and don't consider it to "carry over". It's not saved up for use later. For example, I play league golf on Tuesday afternoons (with the blessing of our elected officials). If I work Wednesday and Thursday nights, I don't take vacation time for Tuesday afternoon.

In my opinion, the second paragraph means that if you abuse comp time, the Council can consider that in your evaluation.

Just a point of clarification, if the employee is an exempt employee, they are not entitled to Compensatory Time as defined by FLSA. Now, the jurisdiction may allow the exempt employee to work one hour during the day, and take the rest of the day off without utilizing any banked vacation or sick leave, but as exempt employees if you are tracking Compensatory (Comp) time, you are making yourself an hourly employee that is now subject to all the rules that being an hourly employee entails.

Even if your jurisdiction allows this time, as an exempt employee you should not be earning or using comp time. You can have the time off if your employment agreement allows it but be careful that you do not jeopardize your exempt status by tracking hours like an hourly employee.

It was intended to acknowledge that the manager could take some time off that would not be charged to vacation to reflect their long work week. That said, the current ICMA Model Employment Agreement did away with that statement because as John points out, its contrary to employment standards for exempt employees. But even in its day, most managers did not believe that they would be entitled to hour for hour comp time. Here is the new language:
Section 13: Hours of Work
It is recognized that the Employee must devote a great deal of time outside the normal office hours on business for the Employer, and to that end Employee shall be allowed to establish an appropriate work schedule.

Under Section 5 we added this an an option:
1. The Employee shall annually be credited with five (5) days of executive leave.