There probably isn't any place to put that team, but what I am saying the same thing can happen in SoCal league as well. This problem isn't specific to one type of league, it's universal. I think you are also looking at this through a youngers lense, as the kids get older this becomes less of a problem.
I think a lot of it has to do with players at the younger ages still don't know if they really like soccer, or they just want to play a sport, or their parents just want them to play. As they approach middle school those fridge players who didn't really want to play, or they are just average players, begin to drop off and the levels begin to balance out.
Here's the other major problem...Younger ages still have rec players wanting to play club, I think that's the biggest problem, club is not unique anymore at the younger ages so you get these lopsided teams from clubs that take ANYONE, and then you have other clubs that still treat it as "club" and only take players that are "club ready" If clubs would only take kids that can actually play, there distribution would'nt be so vast and teams would be more balanced at the younger ages.
I agree the same thing can and does happen in SoCal as well. The difference, though, is no one is locked into anything so it makes it easier to adjust. The teams in my examples have no such flexibility (if CSL enforces the rules): the silver team would be relegated and destroy the bronze teams (and just get repromoted taking a spot away from another team that might be ready), the bronze team will be promoted and be destroyed itself, the silver teams will be locked into their spots instead of being moved up to silver elite, and my son's former AYSO United team still has to go through bronze and destroy all it's competition 12-0 which serves no one.
"actually play". At U9 yes you have some skilled players that know their craft. As previously stated, in the overwhelming majority of cases that does not include the goalkeeper (who should not be playing FT anyway) and many of those kids are just bigger and older and faster rather than skilled. And then you have my son's AYSO United team which came largely out of extras and just wrecks its competition. I don't think it's a solution to say "well it works when it gets older", if the youngers are a mess. Yeah, it works out when they get older, but there are a lot of bad collateral side effects along the way, including the overall focus on having to do what it takes to earn the promotion instead of you know, actually developing your players (like this team which took the promotion, dropped its goalkeeper for an upgrade, and yet still managed to lose all its games)