KAILUA — The dispute between the city and state over who is responsible for maintenance of the Kawai Nui Marsh flood control project has cost a pond restoration project a chance at hundreds of thousands of dollars in federal support.

Congress has allocated $10,000 toward restoring the wetlands, far less than the $700,000 the Army Corps of Engineers had requested to begin the $5 million project next year, but enough money to keep the project alive until the ownership issue is resolved.

U.S. Sen. Daniel K. Inouye, D-Hawai'i, said the token funding in the fiscal year 2006 Department of Energy and Water Development Appropriations Bill at least keeps the Corps of Engineers at the table.

"Failure to reach an agreement between the city and state regarding the land transfer and a maintenance agreement resulted in a significant funding reduction," Inouye said in a news release. "I am hopeful that a compromise will be reached between the government entities whereby each would share in the maintenance responsibilities."

Jennifer Sabas, chief of staff for Inouye's Hawai'i office, said Congress is aware of the transfer dispute, and in this tight budget, slashed the funding because the project cannot proceed without a local sponsor who will maintain the project once it is completed.

Inouye is talking to people and offered the compromise, but now it is up to the state and city, Sabas said, warning that this may be the last chance to save the project. "Clearly, if we're looking at the status quo same time next year, I think we're out of business," she said.

Plans, once they proceed, include restoring 40 acres of ponds and 2,800 feet of stream bank habitat, installing water-bird protection fencing, implementing a predator-trapping program, controlling vegetation and assuring a water supply.

The project hinges on the state having jurisdiction through ownership, license agreement or easement for the project site behind Castle Medical Center and along Maunawili Stream. But after 15 years, the city, which owns the property, and the state have not reached an agreement.

The city was required by a 1990 law — amended in 1998 — to transfer the marsh to the state. The state, however, does not believe it should be responsible for the maintenance of the flood-control project there and has not executed the transfer.

Interpretation of the law has each side saying the other is responsible for the maintenance of the flood-control system, which includes a levee and the Oneawa Canal.

The state Department of Land and Natural Resources is seeking a license or easement to work on the project while the agencies iron out their differences.

Inouye suggests a compromise in which the state would take the 830-acre marsh land and the levee, and the city would continue to maintain the canal, in effect splitting the responsibility of the maintenance of the flood-control system.

Mayor Mufi Hannemann told a Kailua Chamber of Commerce meeting that the city would agree to this compromise, but a city official said the deal needed federal approval.

"That arrangement has to be approved by the Army Corps of Engineers," said Bill Brennan, city spokesman.

Responding to a request for comments about the transfer of the marsh's ownership, the state released a letter it had sent to Ho'olaulima Ia Kawai Nui, a group working to build an interpretive center in the marsh. The letter clarifies the state's position on the land transfer.

In the letter, DLNR Chairman Peter Young said that, by law, the city is responsible for the maintenance of channels, streambeds, stream banks and drainage ways. Young also said the city was to enter into a management lease, license agreement pending the completion of the transfer.

"The transfer of Kawai Nui Marsh is still pending," Young wrote. "The city has refused to enter into a management lease, license agreement, or other similar agreement notwithstanding the statute and repeated requests from the state to do so."

But Laverne Higa, city director and chief engineer of the Department of Facility Maintenance, said a lease agreement isn't necessary now and the city and state should complete the transfer. Higa said the law allows the state to enter into an operation or maintenance agreements with the Army Corps of Engineers. In other words, the state should take responsibility for the maintenance of the flood control system, she said.

The state has maintained that it does not want to be responsible for the flood control system.

Higa said she has several documents showing the state had intended to accept flood-control responsibility and had even prepared for it, but all of that has changed.

"It seems like the state will hold to their position and we'll hold to our position," Higa said. "But we need to somehow come to some kind of agreement."

The $10,000 allotment will keep the project alive, said Joseph Bonfiglio, chief of public affairs for the Corps of Engineers.

"This funding allows the Corps of Engineers to continue working with the city and county of Honolulu and state of Hawai'i to execute a local sponsor agreement, which is needed for the Kawai Nui Marsh Restoration Project to proceed," he said.

Chuck Burrows, member of several groups working to improve the marsh, said the city should grant a conservation easement to the state to complete the project, and the two agencies can settle their differences later.

"But that needs to be resolved and shouldn't be left to go on for years to come," said Burrows, president of 'Ahahui Malama I ka Lokahi.

He said the city is too concerned about flooding issues, which have been addressed with the construction of the levee. In addition, the state project to build 11 ponds will enhance flood control there, Burrows said.

Reach Eloise Aguiar at eaguiar@honoluluadvertiser.com.