The orphaned item strategy of the organization folder applies to, well, items. Thus, repository folders—if you delete a repository (or whatever), its folder will be cleaned up according to those settings. It also gets propagated to the orphaned item strategy for the repository folder, meaning that if you close a PR, the corresponding branch project will get deleted according to your settings.
This has nothing whatsoever to do with discarding old builds. That is controlled by buildDiscarder properties in the Jenkinsfile. The UI should express the distinction more clearly.
Separately, it would be useful to have a plugin which applies a system-wide or folder-wide mandatory build retention policy even to jobs which have a lax policy or none at all.