I definitely use mine in City States. This is by far the most viable strategy, at least in Prince/King difficulty.
Here is why:
1. Just set them and forget them. You will always have those City States as allies.
2. What few City States remain you can bribe into an alliance - just don't invest too much into them, in case the AI instigates a coup. I generally keep them around 160 or so - but no higher, unless it comes by way of Merchants or quests. If you get hit with a coup it's easy enough to go buy them back.
3. You are generally so far ahead of the AI in tech that spying is out - you usually always eclipse the AI, and to such a degree that it doesn't matter if they steal from you, as all they're stealing is techs that you've had for 100 turns or more. And that's if they aren't using their spies for other things, which they do. The idiotic AI can be trailing in tech and it will still run counter-intelligence.
4. Because you have all the City States in your pocket, using spies as diplomats doesn't really have a point. You have enough delegates to have your way with the World Congress regardless.
So if you ask me, using them all on City States is by far the most viable strategy - at least for the difficulties I play.