Building a free-standing wall on top of a retaining wall
I do not think you could rest a second unsupported wall on top of a retaining wall without long reinforcement members penetrating both the retaining wall and the wall on top. Otherwise the upper wall could topple.

Perhaps the top wall should be a fence with posts embedded 18" in the earth on the sidewalk side of the retaining wall. Alternatively there could be a retaining wall extending above grade and then above grade a 2nd dry stacked masonry wall on the sidewalk side to both support the first wall and to have the decorative side of the blocks exposed to the sidewalk.

We have a 4 course Keystone retaining wall on the downhill side of our lot (32" high, with 4" buried in the soil so the top of the wall is 28" above grade). There is a 6 ft high wood fence on top of the retaining wall. The fence posts at 8' spacing are tubular steel 2-3/8" diameter and go down into the hollows of the retaining wall and are concreted in. This has held for 30 years with no movement. These Keystone blocks are dry stacked but each block is pinned to two blocks below with very strong fiberglass/epoxy pegs.

The fact that the wall and fill would be above the water line argues against implementing this project. Is that metal cap the water meter? This would be a major project. Consider being satisfied with just filling with soil around the edge of the sidewalk.