Indio has decided to return almost $1 million in federal funds to Caltrans to get Varner Road and the Jefferson Street/Interstate 10 Interchange project moving again.

The decision comes three months after Caltrans, on behalf of the Federal Highway Administration, sent the city a bill for $970,200 due “upon receipt” after the federal agency discovered Indio had acquired rights-of-way and moved dirt before it was allowed by federal law.

“The city will return the money by the end of the year,” said City Manager Glenn Southard Wednesday during the regular City Council meeting.

With the understanding, he added, that the money - earmarked by U.S. Rep. Mary Bono Mack, R-Palm Springs — will stay part of the project and be returned to the city by the end of next fiscal year.

“We fully anticipate we will get it back,” he said.

Southard said he does not know where the city will get the almost $1 million from, but said the payment will not affect city services.

The money will be paid to Caltrans, which has since paid the FHWA on behalf of Indio.

The announcement to return the funds comes after recent meetings involving city officials, Caltrans, FHWA and a representative of Bono Mack.

Southard said all parties agreed to allow the city to remove Varner Road from the interchange project and let the city build the west side of Varner Road by the fall of 2010.

The violations incurred by the city stem from “construction” and right-of-way purchases for improvements to the west side of Varner Road — which runs parallel to the highway — before the environmental document for the interchange was completed.

That was in violation of the National Environmental Policies Act.

City officials have long asserted that Varner Road should not be a part of the interchange project and that they began work on the street before the overall interchange revamp in order to protect motorists due to its “dangerous” configuration.

Since that segment of Varner Road is now being removed from the interchange project, an amendment to the environmental documents reflecting its removal will have to be completed and could take up to 12 to 16 months to complete, said city officials.

“The I-10 (interchange) is at least a year behind schedule,” said Raymond Wolfe, district director for Caltrans District 8. “This whole thing has held up the construction.”

He said there are a couple of steps that have to be completed before Varner Road is officially removed from the interchange project, but he is confident that can be achieved.

Caltrans has agreed to work cooperatively with the city to get Varner Road and the interchange completed and to ensure the almost $1 million is returned to the city, Wolfe added.

The entire interchange project is estimated to cost about $77.8 million.

“If the city is proceeding in accordance with environmental law and all of the applicable state and federal laws, I will advocate for the city to get the money returned. But we can't have any more hiccups,” he said.