The state-mandated dissolution of the Morgan Hill redevelopment agency is on its way to producing an all-out legal brawl in the courtroom.
The City Council voted unanimously Wednesday to take legal action to prevent the state from enacting penalties related to the city’s potential inability to meet redevelopment wind-down mandates over which it has no control, city staff said.
The city fears it could lose crucial sales tax dollars that pay for general fund services due to the Morgan Hill Economic Development Corporation’s refusal to return assets previously owned by the redevelopment agency to the city, city attorney Danny Wan said.
A state law approved earlier this year as a follow-up to last year’s law that shut down redevelopment agencies, allows the state to withhold local revenues and impose other costly penalties if cities don’t comply with state mandates.
“The city would obviously be interested in getting that resolved. That’s our general fund,” Wan said.
The state is asking for significant amounts of property and other assets to be returned to the redevelopment successor entity – in this case the City of Morgan Hill – for liquidation and redistribution back to the city, Santa Clara County, school districts and other agencies in order to pay for basic services.
A California State Controller’s report released in August said among those assets in Morgan Hill are about $14 million worth of downtown properties owned by the Morgan Hill Economic Development Corporation.
The properties, which include the Granada Theater, Downtown Mall, Royal Clothier building and former site of Simple Beverages, were transferred to the EDC by the RDA last year, during a period when the state said all transactions made by the RDA were subject to review and reversal. The RDA also transferred about $4 million in property tax increment cash for downtown development administrative and insurance costs.
About the same time, the RDA also transferred about $89 million worth of property and assets to the city, and the controller said those have to be returned to the successor agency as well. However, the state will likely allow the city to re-acquire most of those assets to pay for ongoing expenses and maintain certain properties – such as recreation facilities – for their current use, according to city staff and the controller’s report.
The state Controller said the EDC has to return the properties back to the city, but the EDC, about a week before that report was released, decided to take legal action of its own to prevent the loss of the properties.
But it’s the city who could be penalized if the EDC doesn’t produce the assets the controller says are due to the state, Wan said.
The state and the local agencies differ on the nature of the EDC’s ties to the city itself.
The state controller classified the EDC as a “city, county or other public agency,” and was essentially an arm of the city when the transactions were made. The controller’s report notes that the EDC’s board consisted of all five City Council members when the properties were transferred, though the board now consists of seven members only two of whom are council members.
EDC board members and its legal counsel have said the EDC is not a public agency, but instead is a “nonprofit public benefit corporation” with its own board of directors, office space, and insurance policies. As such, it is not subject to the state controller’s directive.
The EDC is worried that if the state acquires the properties, they will be sold cheaply and without regard for the city’s downtown plans which have been in place since 2008.
The City Council agrees with the EDC, and took the vote to pursue legal action to confirm its classification of the EDC following a closed session at Wednesday’s council meeting.
Another discussion Wednesday, at the Morgan Hill redevelopment oversight board meeting, indicates the disagreement could turn into a legal free-for-all.
Oversight board member Pete Kutras, former Santa Clara County CEO, wondered if that board should get involved. He thinks the EDC should not be using the cash it received from the RDA to pursue lawsuits such as the one it plans to file against the state in order to protect the downtown properties.
“In any event, it’s tax dollars. They’re using funds transferred for one purpose, that are not being used for that purpose. I have a problem with that,” Kutras said at Wednesday’s oversight meeting. “The condition of the transfer of the funds was the implementation of the downtown (revitalization) plan.”
Mayor Steve Tate, who also sits on the oversight board, said the EDC lawsuit is related to its ability to implement those plans.
“If they don’t litigate, they might not be able to preserve that capability (to redevelop downtown),” Tate said.
The oversight board was also created by the state law that shut down redevelopment agencies last year. Its task is to ensure the city is meeting its responsibility to pay off existing RDA-financed debts and contracts.
The state Department of Finance has the final say on the former RDA’s expenses and responsibilities.
• State of California: Wants the city and Economic Development Corporation to return about $108 million worth of property and other assets back to the city.
• City of Morgan Hill: As the redevelopment successor agency, says the state is not entitled to about $18 million worth of those assets – now owned by the EDC – which include a number of downtown properties such as the Granada Theater and Downtown Mall. The city has no control over the EDC, and therefore should not be subject to penalties if the EDC does not hand over the properties, the city says.
• Economic Development Corporation: Created by the city in 2011 in response to the state redevelopment wind-down law and to implement the city’s downtown plans, the EDC says it is a private corporation – not a public agency or an arm of the city that would be subject to the controller’s “clawback.” The EDC board also intends to sue the state in order to keep the properties.
• Oversight Board: Created by the state RDA law to ensure former RDA assets are disposed of in accordance with state law, at least one oversight board member is already wondering if the EDC should be using tax dollars to sue the state.
