Minneapolis is self insured with a fund dedicated to liability payouts. League of MN Cities is like any other insurance company and is loath to put out a penny more than necessary so scrutinize claims closely to minimize the League's responsibility. Some cities do not like the oversight and opt out. Those funds cannot be used for other purposes. The fund is paid for with taxpayer money, of course.
As I understand this case, $2 million dollars of the money awarded to the victim's estate was "donated" back to the city to fund the city's gun violence program. The money first went to the award before coming back to the city. That method of diverting funds is what I find to be a problem.