Indeed - on all counts.I agree with cgoll; sounds like a perfect place to have a raised garden with an adjoinging berm. I think though that the first thing I would do is attend a planning commission meeting, keeping your cool, just as the engineer suggested, and ascertain that she can in fact continue to divert water onto your property.
I'd suggest building a levee along your property line. Just refer to it as a raised flower bed. Let the water get 6" deep in her yard, and she might start being cooperative.