Crews repair roads and drainage on Lemans St. and Beaucaire St. in the Village de l'Est neighborhood in New Orleans East. The work is part of a $3.6 million project from a pool of $2 billion in Federal Emergency Management Agency (FEMA) money, which the city received in 2016 for streets and subsurface infrastructure damaged during the Hurricane Katrina federal levee failures in 2005. Photo taken in New Orleans, La. Friday, July 6, 2018.

New Orleans can keep the $2 billion it was awarded in a FEMA settlement for damage to its roads and infrastructure from Hurricane Katrina, the U.S. Department of Homeland Security decided on Friday, overruling a call by the agency's inspector general for the money to be returned.

The decision removes a cloud that has been hanging over the massive settlement, a crucial component of plans by the city and the Sewerage & Water Board to repave or rebuild 400 miles of streets and fix the broken pipes beneath them.

The settlement for damage that the city said was caused by the flooding after Katrina in 2005 came after years of negotiations between former Mayor Mitch Landrieu's administration and the Federal Emergency Management Agency.

When it was finalized in late 2015, it was hailed by city and federal officials as an unprecedented agreement and was seen as a significant down payment on the estimated $9 billion of work needed to fully replace the city's crumbling roads and cracked pipes.

But last year, Homeland Security's Office of Inspector General issued an audit report arguing that the city had not proved the damage was caused by the floodwaters as opposed to the generally dilapidated state of the city's infrastructure long before the levees broke and flooded the city.

That report suggested the Homeland Security Department, which oversees FEMA, demand the money be repaid.

Federal official: New Orleans should return $2 billion for Katrina-related infrastructure repairs

U.S. Rep. Cedric Richmond, D-New Orleans, announced in a press release Friday that Homeland Security had decided against taking any action on the audit's recommendations. 

Richmond had been among the multiple federal and local officials who had criticized the audit.

"We are reminded continuously of the tremendous blow Katrina dealt to our streets and subsurface infrastructure," Richmond said in a statement. "I said all along that the OIG’s conclusion was simply wrong. I’m glad that the department agreed with what countless experts, local officials and my colleagues in Congress knew instead of Monday-morning quarterbacks who showed up years after the disaster."

The audit had been criticized not only by local officials but also by current and former FEMA officials. Craig Fugate, who ran the agency under President Barack Obama when the settlement was finalized, told Congress in a letter that the size of the payment was based on "an exceptionally rigorous approach based on sound engineering principles and technical expertise."

On Friday, a spokeswoman for FEMA said the agency welcomed the decision and confirmed that Homeland Security has decided to take no action as a result of the audit. 

"This decision concludes that FEMA acted appropriately and within its authority when awarding these funds," spokeswoman Jenny Burke said in an email.

City officials under both Landrieu and Mayor LaToya Cantrell lobbied to hang onto the money and, with support for the settlement from FEMA officials and members of Congress, always said they were optimistic about the outcome.

The city and S&WB continued to use funds from the settlement even after the audit was released, though those projects have been proceeding at a slower pace than expected, thanks to federal regulations and difficulties in coordinating work between the Department of Public Works and the S&WB.

'You can't make it up': With billions in bank, major N.O. roads projects still in waiting

“Since taking office on May 7, we have been working diligently with our federal partners in the expectation that this day would come," Cantrell said Friday. “I am glad to have the matter resolved. The city of New Orleans will continue to work in collaboration with our federal partners at the Federal Emergency Management Agency, and we look forward to moving ahead quickly with the work at hand.”

Follow Jeff Adelson on Twitter, @jadelson.​