Thanks for the pointer. I found a solution. Compacting the Family Tree database immediately after doing the edit appears to correct the issue. To be more specific:
The problem I had was that I had duplicate entries of locations in the hierarchy of places. For example, Indiana appeared once with a few people in it. Just below or above it, Indiana appeared again with many people in Indiana and specific locations within Indiana (eg Indianapolis). When I attempted to replace the Indiana that had no sub locations with the second, FTM thought for a while and then showed me a list that had everybody in Indiana. All of the sub locations appeared to be lost. I found that if I compacted my database immediately after doing this edit, Everything was fixed.
I had several cases of these duplicate states. To clean them up, I followed this procedure:
1) Synchronize my on-line and local database
2) Backup my local database
3) Compact my local database. At this point, I had a backed up (2 ways), clean file.
4) Go to the places view and pick the instance of the duplicate location that doesn't have any places within it. Right click and choose "Replace with other place name" This brings up a list of places with the one you are working on highlighted. This is alphabetical so the other instance of the doubled location should be right next to it. Pick this and say OK
5) FTM will think for a while. When its done, you should have only one instance of the doubled location but in my case, all of the local places that were within it appear to have disappeared.
6) Compact the database. After a little bit of time, the tree will reload. When you navigate back to the Place list and the location you are working on, in my case, everything was fixed. I only had one instance of Indiana (for example) and all of the locations within Indiana were back with the correct people in them.
7) Repeat 5 & 6 as necessary to clean up your places database. I had six states that had been doubled.
Hope this helps someone else