I agree, a barrier of some kind on the outside of that fence will help a lot to keep your soil in the yard. Sure hope the city maintains the borders of that pond so you don't have to?
I like the idea of natives, both shrubs and perennials will hold soil better than grass will. Don't forget grass doesn't grow all year 'round but it does rain in winter when the grass is dormant. Clumps of perennials hold onto the soil well, even when dormant as do well rooted shrubs and trees. Grass just doesn't have deep enough roots to do that job.
