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The City of New Orleans began installing metal sheet barricades on doors and windows to secure the Municipal Auditorium from homeless people and other trespassers on March 28, 2017. The building has been vacant since Hurricane Katrina and the city is still in negotiations with FEMA for money to restore the building. A new report from the inspector general that oversees FEMA is recommending that the city be forced to return $2 billion in federal aid aimed at fixing the city's streets and other infrastructure because the city has not proven that the damage was caused by Katrina's floodwaters.

Advocate staff photo by MATTHEW HINTON

A federal inspector general is recommending that the Federal Emergency Management Agency take back the entire $2 billion global settlement earmarked to help New Orleans repair city streets and underground pipes damaged by Hurricane Katrina's floodwaters. 

Were the agency to accept the central recommendation of an eye-popping report released Wednesday, it would devastate the city’s hopes of improving its creaky infrastructure. The $2 billion lump sum is the bulk of what the city has on hand as it starts work on an estimated $9 billion backlog in repairs.

City officials said Wednesday that they have spent $350 million of the aid — money that would have to be repaid were the IG's recommendation followed. 

Still, the possibility that New Orleans will have to reimburse FEMA seems unlikely. Agency officials disagree with the recommendation, and unless the inspector general appeals to higher authorities in the U.S. Department of Homeland Security, which oversees FEMA, the matter could end there. It's also not clear whether such a massive clawback has ever been attempted.

Zach Butterworth, the city's lobbyist in Washington, said New Orleans officials have met with a raft of federal officials, ranging from members of Congress to FEMA staffers and high-ranking officials at Homeland Security, including Secretary John Kelly, to make their case. There doesn't seem to be any enthusiasm for taking back the money, Butterworth said.

A news release issued by FEMA Wednesday said the agency agrees with the inspector general 90 percent of the time but that this case is an exception.

News of the inspector general's audit first broke in January, when a draft copy of the report was leaked. The final version appears to differ little from that one, except that it recommends the entire global settlement be returned, whereas the draft recommended that New Orleans be allowed to keep a fraction of the money.

The gist of the report is fairly simple. Auditors found plenty of evidence that New Orleans’ infrastructure was "old and in poor condition" before the collapse of the levees, which left a huge swath of the city to marinate in floodwater for weeks. As an example, the report says that the amount of "unaccounted for water" leaking from New Orleans' water mains before Katrina was 3.5 times the national average.

The audit also cites a 2004 report by the Bureau of Governmental Research saying that 32 percent of the city's streets needed "major rehabilitation or total reconstruction" and that 34 percent needed "immediate maintenance."

The auditors complained that the city was unable to provide much in the way of official records showing what shape its infrastructure was in before the storm hit, and they questioned the city's assertion that the relevant records were destroyed by the flood. 

"This massive investment — representing almost $5,200 for every man, woman and child in New Orleans — while perhaps sorely needed, is not eligible for a FEMA disaster grant because there is no evidence that the damage was caused as a direct result of the storms," the report says.

City and FEMA officials counter that the Stafford Act — the law that governs federal disaster aid — does not mandate that pre-disaster conditions be perfectly documented. And they both have praised the process used to settle on the $2 billion figure.

Former FEMA Administrator Craig Fugate, in a letter to Congress, said FEMA “used an exceptionally rigorous approach based on sound engineering principles and technical expertise” to come up with the $2 billion figure. FEMA's Wednesday news release recounts the measures the agency took in exhaustive detail.

Cedric Grant, who is executive director of the Sewerage & Water Board and oversees all of the city’s infrastructure projects, said the city and FEMA “had teams that went over every mile of street in the city.” He called it “the most comprehensive review of a road system for damage that FEMA has ever done.”

Butterworth, the city's lobbyist, said in an interview Wednesday that city officials continue to believe the inspector general's report is fatally flawed.

"The IG relied on no experts. They have no technical expertise in this area, and they basically gave an engineering conclusion that they disagree with New Orleans' and FEMA’s assessment," he said. "The idea that we as a city ... that the sewer system, the water system, the roads and the drainage system were not damaged by hurricanes Katrina or Rita just doesn’t match up with reality."

Even if FEMA has never attempted a clawback along the lines of what the report proposes, the auditors said there is precedent to deny aid to cities in similar situations. The report says Waterford, New York, was denied federal aid for flooded streets because interviews and a lack of records suggested its problems resulted from "a lack of pre-disaster maintenance."

Follow Gordon Russell on Twitter, @GordonRussell1.