Pete,
If you have the valve set to CITY and water is continuously coming out the overflow, there's something wrong with the valve, or the lines on the back side of the valve are hooked up in the wrong places.
You might try all 4 positions on the valve to see if any of the positions pass city water to the faucets, but not overflowing out of the fresh tank.
If you want to investigate the connections yourself, you'll have to take down the pass through storage rear wall, next to the Universal Docking Center (UDC). I've attached a picture that shows which connections go where on the back of the valve.