Because it's cheaper to settle than it is to go to court, and because the city wants this story to go away.
While criminal law is all about innocence or guilt, civil law is all about perception. Even though the officer was not convicted of breaking any laws, in the public eye, he's guilty, and should pay. It's possible that a jury would award significantly more than what is being offered in a settlement, but that's a gamble for the family. A settlement is a sure thing, and saves the cost of ongoing litigation on both sides.
This whole event has been a PR nightmare for the city, and for police officers everywhere, so I'm sure some guys in suits are pressing for a settlement, to put an end to the parade of news stories and commentary.