Also, another variant for the placement of the city that is not an archeotech water purifier:
A place where an absolutely GIGANTIC fucking land leviathan has died very long time ago. Like, thing that is the size of Everest or something. It rotted and rotted but still can't rot away until these very times due to magical energies suffusing it. Whatever part of this horrible husk rots at the moment, it seeps not just usual rotting spoiled filth but rich, iridiscent Ichor.
I can even imagine the first line in the holy book of the city's official but scarcely-enforced religion - "Eat, ye maggots of the divine corpse!"