The report, set to cost the council $28,000, will compare improving the dam to meet the Dam Safety Committee's standard with decommissioning it by removing part of the dam wall and directing the water down Jerrara Creek.

Improving the dam to the one in 100,000 Annual Exceedance Probablitiy Flood standard would cost $3-4 million, while decommission is expected to cost $680,000.

Councillor Ben van der Wijngaart asked that the report include providing a shallow wetland not held back by a dam to maintain the current ecology.

"I'm also conscious Jerrara Dam has a long history and major investment by council to restore the valued green area," he said.

The possible decommission has generated mixed feelings among residents who live close to Jerrara Dam.

Beef farmer Gary Marks, whose family has run dairy cattle in the area for 150 years, said he wanted to see the dam stay.

"Before the dam was put in, Jerrara Creek stopped flowing in dry times, which caused problems for the cattle," he said. "Now it's running all the time."

While the Marks family has sold some land downstream of the dam, it still owns Terragong House, which would be inundated if the dam were to spill over the wall.

"But when you're farming on a flood plain, you get used to it," he said of the evacuation warnings.

Fellow Jerrara dairy farmer Greg Harris said his property would not be affected if the dam were to fail, but said the council would need to adjust the causeway crossing the creek if the dam were decommissioned.

"They would need to convert the causeway into a bridge so residents can get in and out - there's only a couple of small pipes under the causeway at the moment," he said.

"If there's water over the causeway, I have to walk more than a kilometre to the dairy."

But the future land use is set to be hotly contested once the report comes back to the council - it will look at a possible sale of part of the land to recoup costs and Cr van der Wijngaart was concerned about the possibility of reclassifying the land from community land to operational land for private use.

It is currently zoned RU2 Rural Landscape, which would allow for some development.

"I do recognise the need for council to raise funds for this unexpected high expense whether we decommission dam wall or whether we keep it," Cr van der Wijngaart said.

"I do believe that Kiama Council would face a moral dilemma in recouping costs, a dilemma that would arguably become unethical and a double standard because other developers would never be allowed to subdivide for such a reason."

He said land should be developed on planning grounds only, not owner profit.

Councillor Lexie Wheeler suggested the land could be used for development similar to Atamai Village in New Zealand where Cr van der Wijngaart is currently establishing a carbon-neutral community.

"I can't see why we can't consider it as a place where we could have a transition town, where people can ride bicycles and do the things that they're doing in New Zealand so when we talk about selling the land, that's possible given that it becomes something where people are able to use the land in a productive way," she said.

But councillor Warren Steel said the council should keep its options open.

"It's all very well to have this green area where you can ride bicycles around but if you think about what $3m can do for this council - we're already developing land in Gerringong - down the track, just consider that," he said.

Kiama Mayor Sandra McCarthy said much of the discussion was "speculation".

"There will be more discussion as it develops - we have a study to do and the reclassification of land will have to have a case put to the council with the pros and cons researched," she said.

Director of Engineering and Works Bryan Whittaker likened the Dam Safety Committee's standard to a "Noah's flood" scenario, saying the water level was still 1.5m below the top of the dam wall when it hit red alert last March.

He said the issue's complexity meant a report would be due back in December.