UPDATE: The City Council Wednesday night unanimously approved a resolution to extend the escrow period for the $2.9 million purchase of the two fire stations until April 30, and directed City staff to proceed with seeking an alternate financing agreement.
Fearing a worst-case scenario in which the City won’t have enough money to make annual payments of about $300,000 if it loses a lawsuit against the State Controller’s Office, the bank declined to offer the City its preferred financing plan to acquire the two fire stations it plans to buy back from Santa Clara County.
On Wednesday, the Council will consider 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.
As a condition for terminating the contract for fire and EMS 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 inside the city limits - one on Old Monterey Road and one at the corner of Dunne Avenue and Hill Road.
The long-term 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.
However, after the Jan. 23 meeting the bank rescinded that offer due to a lawsuit, the outcome of which could jeopardize the City’s ability to make the annual payments.
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 without sacrificing service. City staff started negotiating with the Central Fire District on the fire station purchase about that time, and eventually arrived at the $2.9 million price tag.
In a wholly unrelated sequence of events before those negotiations ended, the Council filed a lawsuit against 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 currently owns the properties which were purchased by the RDA in 2008. The RDA transferred the properties to the EDC last year.
The state 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 such as sales and property taxes, and impose other costly penalties, according to the state RDA wind-down law.
The City’s lawsuit says such a penalty is illegal, and besides the City has no control over what the EDC does and thus should not be penalized for the EDC’s decisions.
Bank of the West fears the potential negative outcomes of this lawsuit, according to City staff. Specifically, if the court were to formally order the EDC to return the properties to the City, and the EDC refused to comply with that order, the state might withhold the local revenues the City plans to use to purchase the fire stations, City staff said.
Morgan Hill Finance Director Kevin Riper said this is “an unrealistic fear,” citing the fact that the City’s general fund has a reserve of about 25 percent of annual expenses - or about $5 million.
If the Council gives its permission, 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 Council will consider a resolution to this effect at Wednesday’s meeting, at 7 p.m. at Council chambers, 17555 Peak Ave.