As an American living in Europe, I wouldn't be caught dead pronouncing the city "baloney". The thought never would have crossed my mind to be honest. I'd use an anglicized version of the Italian pronunciation bo-loh-nya. And not because I thought about it, but because anything else would sound rediculous. At least to my ears.

Taking it one step further to the sausage, I'd only use baloney to refer to the American cheap imitation of the Italian stuff. For real Italian bologna, I'd probably pronounce it the same as the city and call it "Bologna sausage".