The whole free/not-free/kinda-free issue is raised in a couple of ways in this thread. NBC mentioned the challenge of creating a business model (caveat recent advertising efforts)
The question I have been following (and Dan Gillmor as well) is this, "Is there a 'self supporting' model for local journalism?"
For that to work the revenues generated have to cover the cost of running the site. And my experience is that this has to mean both keeping the cost of running the site as low as possible as well as finding revenue. We can see by example that without such a model these sites disappear.
Three possible models come to mind, although I'm sure there must be more;
1) Visitors to the site pay for access. Historically this is challenging, but with the experience of 'free' sites vanishing due to money problems perhaps there is a core set of consumers who could create a viable market for this.
2) Advertisers on the site share the costs of operating it amongst themselves. This is the current model for free 'weeklys' where advertising funds are the largest revenue model. The 'value' of net advertising however is much lower than paper advertising thanks in part to Google and others. So this is made harder by that and people more easily avoiding the advertisements.
3) A civic fund, basically spending some of the community's tax dollars on funding a local news portal/site.
Given the way that everyblock got created perhaps a migration where its tax funded at first, then advertising funded later? Sort of a private/public partnership. Clearly every city has communication issues with their citizens so they could use this sort of channel to reach out to folks who don't keep flyers around (Sunnyvale for example has a flyer which says which days of the year are free for bringing in hazardous waste to the dump)
I certainly agree with the general sentiment that this is a useful service.