T.S.
Honestly, I would not want to have a party with 5 year old kids in the water until they were older, unless the parents were all watching their own kids. Just too much potential danger for me, but I'm admittely a worrywart with water.
If you wanted to keep with the water theme, you could fill up water balloons and have kids play games with them (like egg/spoon race) and the goody bags could be little sand buckets. You can usually find cheap ones at the Dollar store. Musical chairs on towels instead of chairs? Leis/luau decorations and fruit kabobs would be cute.
My 5 year old had her last party at the bowling alley. If you had a duck pin alley near you it'd be even better (smaller balls).
Good Luck!
T.