It is block diagonal in the sense that you can always permute vertices such that each block represents a maximal cluster. Note that the eigenvalues will not change because if your original matrix is $L$, and you permute it to be block diagonal, you get $\tilde{L}=P^TLP$, where $P$ is your permutation matrix, and so if $Lx=\lambda x$ then $P^TLP (P^{-1}xP)=\lambda P^TxP=\lambda (P^{-1}xP)$,
(since $P$ is orthonormal). So for the purposes of spectral analysis, it's completely equivalent to work with the block diagonal version of $L$. The nice thing about putting it in block diagonal form will cause the eigenvectors to also be in blocks.