DALLAS -- Construction is underway on a first-of-its-kind, partially bond financed project said to offer a permanent solution to flooding in the metro areas of Fargo, N.D., and Moorhead, Minn.

Backers are optimistic despite an ongoing lawsuit seeking to torpedo the $2 billion flood diversion project, which is supposed to protect more than 225,000 residents and $14 billion of property by directing Red River floodwaters away from Fargo and other areas that suffered from a massive flood in 2009 that caused havoc in the region.

Fargo-Moorhead Area Diversion Project Inlet and Control structure south of Horace, N.D.
Construction began in April on the flood diversion project designed to protect Fargo, N.D. and Moorhead, Minn. Fargo Moorhead Area Diversion Project

Approximately $900 million would be financed through the issuance of sales tax revenue bonds.

The project marks the first use of a public-private partnership to help fund a project overseen by the U.S. Army Corps of Engineers, which backers say will save $400 million and reduce the project delivery timeline by more than 50% compared with traditional approaches.

The project has three main parts: in-town levee projects; a southern embankment; and a bond-financed, 36-mile-long, 1,500-foot-wide diversion channel with 32,500 acres of upstream staging, including aqueducts, river inlets and bridges, and a dam. The southern embankment regulates water to prevent flooding of the metro area during a significant flood.

Not everyone is on board with the project. Protecting Fargo and Moorhead from flooding comes at the cost of inundating land south of the metro area during severe floods. A group of residents that would be impacted formed the Richland-Wilkin Joint Powers Authority and are suing to stop the development of the project.

On Tuesday U.S. District Judge John Tunheim in Minnesota heard arguments on whether construction should be halted until the Fargo-Moorhead Diversion Authority and the Corps receive the necessary permits from the Minnesota Department of Natural Resources.

The ongoing federal case questions the authority of the Corps to construct the southern embankment and associated infrastructure.

The Minnesota Department of Natural Resources denied a permit to build a dam across the Red River in October, arguing that emergency measures like those used during the 2009 flood and new dikes should be enough.

The DNR "has determined that this project does not meet Minnesota's standard of being reasonable and practical to protect public safety and promote public welfare," Minnesota Gov. Mark Dayton said in a statement. "Additionally, the project application failed to demonstrate sufficient measures to mitigate the negative impacts of this project on the surrounding area."

John Shockley, an attorney with the firm Ohnstad Twichell, the bond counsel and project lead for the flood diversion project, said that it isn’t unusual for projects or this magnitude to encounter some opposition.

“In the FM diversion project the group has over the years tried different strategies and techniques,” he said.

“The judge isn’t likely to rule from the bench,” said Shockley. “This is just another chapter in the court case and the hearing is for a temporary injunction.”

Corps project manager Aaron Snyder said the project is authorized and has congressional funding.

“With any project to get to a treat report you have to have significant input from the public and from all of the agencies,” Snyder said. “Once you have all of the input the Corps looks at it and makes a recommendation and that goes to the administration. The administration sends that to Congress to approve it.” The project received authorization from Congress in 2014 and Congress provided funding to construct the project in 2016.

Despite the outstanding legal questions, construction has been underway since April on the Diversion Project Inlet Control Structure south of Horace, N.D.

The federal government has committed to $450 million in construction appropriations. The project has received $20 million in federal funding through the Corps work plan for fiscal year 2017. The project previously received a federal “new start” status and $5 million in federal appropriations for construction in the fiscal year 2016 Corps work plan. The fiscal year 2016 funding is being used for construction of the diversion inlet and control structure south of Horace.

Shockley said that the authority will receive the third draft of bid proposals from competing developers for the public-private partnership at the end of the month and on December 15 final bids will be submitted. The project will select the developer in the first quarter of 2018.

“A developer will be on board and construction will begin on the diversion channel in the third quarter of 2018,” he said.

The four consortiums eligible to bid are Lake Agassiz Partners, Red River Valley Partners, Red River Valley Alliance and Red River Partners, all made up of national and international firms.

The $900 million price tag of the diversion channel is to be financed through sales tax revenues issued by the Diversion Authority -- an entity that was created by an inter-governmental agreement among five member entities: the city of Moorhead, Clay County, Minn., Cass County, N.D., Fargo, and the Cass County Joint Water Resources District. The sales tax started six years ago when Cass County citizens voted to authorize the collection of 0.5% sales tax. They extended the tax until 2084 in a November 2016 referendum.

“During the course of the P3 contract – which is based on a very long construction cycle – we are expecting to make two major milestone payments to the successful proposer,” said Shockley. “The developer will retain about $400 million to $450 million in debt that would be repaid through the availability payment over a term of 30 years that would commence after substantial completion.”

Over the course of the P3 contract, the authority will make two major milestone payments to the contractor, Shockley said. Those portions of the funding are anticipated to be funded through the issue of the sales tax revenue bonds.

In the event that there is a shortfall in sales tax revenue, the authority has the availability through the Cass County Water Resources District to levy an assessment – “somewhat of a novel feature in North Dakota,” said Shockley.

The special assessment district is to be a backstop for the sales tax revenue. “If in one year the sales tax is off the special assessment would be levied and it serves as an assessment against the property and would be collected and used to make up the shortfall,” Shockley said.

North Dakota is not providing a backstop on the bonds but the state has appropriated $570 million for the project.

Although the bond will be issued by the Diversion Authority, the Corps is studying the model closely with the hopes of replicating the funding in other federal projects.

“The idea is that the Army Corps would have the opportunity to participate in the P3 process and learn from it and perhaps after that take those lessons learned and determine a way they can implement it at a federal level,” said Shockley.

“We are trying to learn as much as we can from the P3 process so that we can take that and apply it to other projects across the nation,” said Snyder. “The model that we are using here could be something that is applicable to our flood risk management projects.”

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