Wow, Ebbie. Is this Juneau, Alaska, we are talking about? Looking at the map I can see your problems but I think you are making great strides to deal with them. More power to your elbow.
There isn't an easy solution to dealing with poor performers. If you have a small catchment area -- and this can happen even in a big town -- then you have to work with what you can get. There isn't an easy way to tell someone that they are not going to get a booking or a repeat booking at your club. The lines you used in your original post are quite reasonable but those who want to take offence will.
There was a post some time ago in which a performer complained he had been told by a club organiser that he was good but wasn't right for the club. He took offence at what I see as a very reasonable comment. There have been performers seeking gigs at the small club on the outskirts of London I help to run who I thought were very good wouldn't have been able to hold our particular audience for a whole evening.
Also there may be performers who are technically impressive yet whose personality would alienate the audience - and they can be far worse than poor but pleasant performers.
You might consider changing the format of your club. Instead of 20 minute slots, you might try allocating short slots of one or two songs to all-comers then giving longer slots to better artists. If someone comes along for a couple of songs and is obviously good then invite them back and increase their time.
To find locally talented people you might try holding singarounds - informal gatherings in a pub or a hall where you go round the room inviting everyone in turn to sing, recite or play. This could encourage people who might be intimidated by the idea of standing up on a stage for the first time.
Best of luck. Foxen would love to play at your venue but sadly I don't think we'll make it the States.