Kids area - Bark chips?

We have an area in our back yard that is an unusable mess at the moment. It has an old shed that is practically falling down, a tiled area where a spa used to be that is missing a few tiles and a messy patch of random plants and weeds, and a big pile of clay/dirt that has been dug out of another section of the yard.

Talking to DH today, we are thinking of turning into a play space for the kids. My vision is to have the area as a kind of fantasy land with garden gnomes, stepping stones and a few plants that are kid friendly (ie no cactus or poison ivy :p). Maybe a blackboard wall against the fence and some water play or similar. The area where the shed & tiled bit are would have to be covered over. I'm thinking that we could put a layer of dirt and put bark chips over it like at the parks.

So for those of you that have bark chips in your backyard, how do you find it? Does it attract cats who like to use it as a toilet? Our neighbours have cats that already use our front yard so this is a concern. Is there something better we could use? We are on a budget here so cheap is always good!