In a move that took Morgan Hill officials by surprise, Bank of the West denied the city’s request for a loan to buy back two fire stations – an integral part of the new contract with CalFire to provide fire and emergency medical services inside the city limits.
The bank’s decision to revoke the financing deal, which the Council approved last month, was made out of fear that the outcome of pending litigation over former redevelopment assets will hinder the City’s ability to make the $300,000 annual payments.
On Wednesday, the Council considered a resolution extending the escrow period for the $2.9 million purchase until April 30, from its original expiration date of Feb. 1, allowing City Hall more time to find a new financing option and securing the $100,000 deposit already placed on the stations, according to City staff.
The Council’s decision was scheduled after press time, but Mayor Steve Tate said the bank’s decision to renege on the financing plan that was already approved by the Council was a “total surprise.”
“It’s such a remote possibility” that the City would be rendered unable to pay $300,000 a year for the fire stations, he said. “Even if it did happen, we have our reserve fund.”
The City has about $5 million in its general fund reserves, which are set aside for emergency expenditures.
As a condition for terminating the contract with the county’s Central Fire District, and to maintain control over its own fire department which is newly serviced by CalFire as of January, the City in December agreed to purchase the two CFD stations – one on Old Monterey Road and one at the corner of Dunne Avenue and Hill Road.
The City agreed to buy the stations for about $2.9 million. Santa Clara County purchased the same fire stations from the City in 1995 – when the City first contracted with CFD – for $910,000, according to City Finance Director Kevin Riper.
The longterm financing plan to acquire the stations, approved by the Council Jan. 23, was to enter into a “lease financing” agreement with the City’s primary bank – Bank of the West – with the City making annual payments of about $300,000 for at least 12 years, at an annual interest rate of 2.65 percent, according to a City staff report.
In July, the Council approved a five-year, $19-million contract for CalFire to provide fire and EMS to Morgan Hill residents, in order to save money on the same level of service. City staff started negotiating with CFD on the fire stations about that time, and arrived at the $2.9 million price tag.
However, days after the Jan. 23 meeting, Bank of the West rescinded its offer.
In a wholly unrelated sequence of events before the fire station negotiations ended, the Council sued the California State Controller’s Office to prevent the Controller from imposing costly penalties if a third party – the Morgan Hill Economic Development Corporation – declines to return about $14 million worth of downtown Morgan Hill properties to the City. The EDC joined the City’s lawsuit.
The EDC currently owns the properties which were purchased by the RDA in 2008. In 2011 the RDA transferred the properties to the EDC, which the City created that year to revitalize the properties in accordance with the Downtown Specific Plan.
Then the state, enforcing the 2011 California law that dissolved RDAs and imposed the penalties, said this transfer was illegal, and the EDC has to return the properties – which include the Granada Theater, Downtown Mall, Royal Clothier and Morgan Hill Cigar Company buildings – to the City for liquidation and redistribution to Santa Clara County, school districts and other agencies in order to pay for basic services.
If the EDC fails to return the properties, the state can withhold local revenues from the City such as sales and property taxes, and impose other costly penalties, according to the 2011 state RDA law.
However, the City’s lawsuit says such a penalty is illegal, and besides the City has no control over the EDC.
Legal or not, Councilman and EDC board chair Larry Carr said the 2011 state law closing and winding down the redevelopment agency is bad business.
“It drives me nuts. The whole intent of dismantling (RDAs) is to grab these tax revenues and disperse them to taxing agencies the state has responsibility for, and ultimately sell (the properties) off for (current) cash value,” Carr said. “What we want to do is develop that property to improve its value,” thereby bringing more sales and property tax revenues to local and state agencies.
Bank of the West fears the potential outcomes of the lawsuit, according to City staff. Specifically, if the EDC refused to comply with a potential court order to return the properties to the City, the City could lose significant sales and property tax revenues – the intended source of annual payments for the fire stations, City staff said.
Riper said this is “an unrealistic fear.”
Carr further explained how the delay in financing for the fire stations is a product of the ripple-effect of the state’s illegal threat to withhold local general fund revenues.
“The bank got nervous. That affects our ability to do a deal to deliver public safety services that we had (already) planned. Now we have to re-examine how we’re going to do that,” Carr said. “This is an example of what happens when the state reaches into local resources” to cover its own costs.
A spokesman for Controller John Chiang’s office disagreed, and said the office “doesn’t have any discretion” in enforcing the state redevelopment dissolution law, which closed all RDAs in the state as of Feb. 1, 2012.
“The redevelopment successor agency (the City) is responsible for retiring the redevelopment agency’s debt, and needs those (downtown) assets to do it,” Controller’s spokesman Jacob Roper said. “This money is just going to the locally controlled body that will use it to retire the redevelopment agency’s debt.”
Assuming the Council gave its permission Wednesday, City staff will spend the next few weeks looking for the next-best deal to finance the fire station purchase. The interest rate of 2.65 percent initially offered by Bank of the West is “unlikely to be matched by any alternate” bank or financial institution, but the City might be able to acquire a longer-term agreement that will at least keep the annual payments at or near the $300,000 they hoped for, the staff report said.
The competitive process to solicit the best financing deal in December drew offers from five banks, with interest rates ranging from 2.65 (the lowest) to 7.99 percent, over periods ranging from 12 to 30 years, according to City staff.
Bank of the West has been the City’s “commercial checking account” provider for at least six years, holding municipal funds for accounts payable, accounts receivable and water and sewer revenues, Riper said.
As a result of the lawsuit against the Controller – which also names the state Department of Finance and the County Auditor Controller as defendants – the EDC enacted a “stand-still” agreement to cease all efforts to sell, develop or significantly alter the properties until the litigation is settled.
The lawsuit is still lingering in Sacramento County Superior Court, and no proceedings or arguments have yet been scheduled.
