If the street were made to be one-way instead of two-way, could it be narrower, leaving room for the sidewalk AND the ditches? Also, it isn't clear from his description, but maybe that would eliminate the need for "additional utilities improvements due to [the sidewalk and widening]".
It would inconvenience the residents on that street and motorists who pass through. But presumably that's better than bankruptcy.
Or here's an even crazier idea: Could the underground drainage be avoided if the city annexed a strip of land from the adjacent properties? That would surely piss them off, but if it were implemented city-wide, as part of a "we're all in this together" kind of campaign to revitalize the city without going bankrupt, maybe it would be more palatable. At least it might seem more "fair" if everyone loses a little land, rather than only some streets. And if owners were compensated monetarily, heck, some might even like it.