Answer
Kudos to Bill for the rapid solution and creative obfscation, and to Jim for the clear explanation. A FLOATING object will displace water with the same mass as its mass. But an object not supported by the water will displace water only equal to its volume.
Another way to look at this is to imagine lowering the cannonball down by rope. Let's say it weighs 80lbs. The cannonball is contributing 80 pounds to the mass of the boat, that must be counteracted by displaced water. After you lower it into the water, its pull on the rope is reduced to 70 pounds (using 8 as the specific gravity of iron). The "cannonball-boat system" still has the same mass that must be supported by displaced water. The cannonball is displacing 10 pounds of water, and contributing 70 lbs to the mass that must be supported by the water displaced by the boat, so the water level doesn't change. However, when the cannonball reaches the bottom of the pool and the rope goes slack, the cannonball still displaces 10 pounds of water, but the boat floats 70 pounds higher (80 pounds higher than before the cannonball was lowered into the water), lowering the water level.