KAILUA — An agreement by the city and state to share responsibility for flood management at Kawai Nui Marsh paves the way for a $5 million wetland restoration project, officials said yesterday.

Under the agreement, the state Department of Land and Natural Resources will acquire portions of the marsh owned by the city as well as the flood control levee. The city will continue to maintain the Oneawa Canal and a canal that runs parallel to the levee.

In conjunction with the agreement, signed last week and announced yesterday, the Legislature advanced a bill that would fund the maintenance of the levee and programs in the marsh. The legislation now must go to a conference committee.

The 17-year dispute between the city and state over liability had threatened an Army Corps of Engineers project that would create 40 acres of ponds, restore 2,800 feet of stream bank habitat, and install water-bird protection fencing among other improvements.

The 850-acre marsh — an ancient fishpond — is home to four endangered Hawaiian water birds and is surrounded by cultural sites. Residents and visitors have spent thousands of hours restoring sites, clearing waterways and conducting educational tours there.

But the marsh has had flooding problems, and the levee was raised because of a particularly bad flood in 1988. After that, control of the marsh was to have been transferred by the city to the state. But the transfer of land never took place and more recently the state had balked, saying the city was responsible for flood control.

The agreement, announced at a press conference yesterday at the state Capitol Rotunda, allows the marsh to reach its potential as a cultural, historical and ecological showcase of Hawaiian history, advocates said.

"This is a victory of, by and for the people ...," said Muriel Seto, who helped form a group that challenged an early plan to convert the wetland to an asphalt parking lot in 1968.

Seto, 82, who now lives in Aloha, Ore., said thousands of people have worked to save the marsh. It earned federal recognition in 1979 as a cultural and historical district, and in 2004 was named a wetland of international significance by the Ramsar Convention, the environmental branch of the United Nations.

"This is a marvelous example of what can happen if the public doesn't go away," she said by phone.

Dozens of people at yesterday's announcement said the agreement is historic, not only for ending the 17-year standoff but because restoration projects can now move forward.

"As we improve a lot of the habitat, we're also enhancing the (water holding) capacity," said Peter Young, director of the DLNR. "It's not part of the flood control but by doing that, it helps. So it has multiple benefits."

Jennifer Sabas, Hawai'i chief of staff for Sen. Daniel K. Inouye, D-Hawai'i, said the senator has asked for $4.1 million to restore 70 acres of wetland bird habitat.

"We weren't able to do it over the last two years because of the inability of the state and the city to come together," Sabas said.

Others were just glad that the city and the state settled their differences, including Susan Miller, president of the Kawai Nui Heritage Foundation. The agreement is a testimonial to the vision of all the people who were behind the protection efforts from the beginning, Miller said.

"I personally am very glad that the two entities who have control over this natural and cultural resource have realized they have a responsibility to work together, and it's larger than any disagreements they may have in other areas," she said.

Besides the wetland project, other organizations have been making plans for the marsh and are talking about a cultural and education center, trails and meeting buildings, said Chuck "Doc" Burrows, who belongs to several groups that work to improve the marsh.

"This settlement between the city and the state opens those doors to venture forward," Burrows said.

Reach Eloise Aguiar at eaguiar@honoluluadvertiser.com.