It's not clear which city she is mentioning, but it's presumably Gotham or Star City.
Pretty much all of the DC shows airing alongside Supergirl make stealth references to other DC properties that they can't normally talk about (e.g. Legends of Tomorrow had Rip Hunter say that he'd seen "Men of Steel die and Dark Knights fall"). This is in a similar vein.
Argument for Star City
Greg Berlanti and Andrew Kreisberg are showrunners for both Arrow and Supergirl (with Kreisberg also being showrunner for The Flash). Because there is contradicting evidence (see below) it could have just been a reference made to those shows before it was decided to have a crossover with Flash and establish that it was in a different universe.
However… four episodes later, there was a crossover with the Flash, which established that Supergirl was not in the Arrowverse at the time (now that the show has moved to The CW, it is in the Arrowverse and will have crossovers with those shows). Since Supergirl didn't know any of the names of superheroes that Barry mentioned (including Green Arrow), that makes it less likely that on her Earth, there is an equivalent to Green Arrow and the other masked vigilantes.
So it's only Star City if the reference was written into the script before it was decided to make the Arrowverse an alternate universe (which sounds like a possibility).
Argument for Gotham
The fact that they have to indirectly talk about the city makes sense for Gotham, since it's currently tied up with the movies. But it would be strange if it were some other city that they can talk about (e.g. Coast City, which they have mentioned by name).
Gotham is another DC city where there are lots of masked characters (i.e. Batman, Robin, and the majority of his rogue's gallery). It's also currently featured in the show Gotham, which is currently airing right now. No other city in the DC universe have a high number of DC heroes or villains who wear masks, so it's the most likely candidate.
However… Arrow also has similar reference in its shown. Oliver says that Felcity's codename should be "Overwatch" because "Oracle had already been taken." This is in reference to Barbara Gordon (a former Batgirl). The first episode of The Flash also had a reference to Wayne Industries on a newspaper from the future. It seems strange that two parallel universes both have Gothams in it, unless it was just a stealth joke intended before it was established that Supergirl was in its own universe.
In the end though, it seems to be there for a quick gag, and shouldn't be taken seriously