SACRAMENTO — A massive housing project that San Bruno killed in a controversial vote last month could rise from the dead.

Facing possible lawsuits and state fines over its recent rejection of the 425-unit project, the City Council will meet privately in the coming weeks to consider its options for the proposed development.

City Manager Jovan Grogan said Friday that, depending on the outcome of that closed-door discussion about “potential legal and financial ramifications,” the Mills Park project could appear again at a future public meeting.

“The project will likely come back before the City Council for additional action shortly,” Grogan said.

The Peninsula city of 43,000 was notified by state regulators this week that its failure to approve the mixed-use development near downtown San Bruno may violate California law.

Zachary Olmstead, deputy director of housing policy development at the state Department of Housing and Community Development, said in a letter Tuesday that the Mills Park project met all of San Bruno’s general plan, zoning and design review standards. That means it could only be denied if it would hurt public health or safety in a way that couldn’t be offset.

“Absent those findings and consistent with the law,” Olmstead said, the department “encourages the city to approve the project.”

Housing advocates were stunned by the project’s rejection and cited it as an example of the state’s broken process for permitting new homes.

The City Council rejected the plan on July 10 by a single vote, after three years of negotiations and $3 million spent by Signature Development Group on the approval process. Signature Development Group agreed to many of the city’s requests, including giving $10 million to the general fund, incorporating an upscale grocery store and adding 64 affordable homes. The proposal came in the wake of a city plan — endorsed by nearly 70% of voters — to encourage developers to build in an area near San Bruno’s BART and Caltrain stations.

While a majority of the five-member City Council favored the Mills Park project, it was unable to secure enough support last month when two members recused themselves from the vote and a third voted no. That councilman, Marty Medina, echoing the concerns of some local residents, argued that the development was out of scale with the neighborhood of mostly single-story homes and would make parking and traffic worse.

San Bruno now risks falling out of compliance with a state mandate for cities and counties to plan enough housing to accommodate their expected population growth at all income levels.

In his letter, Olmstead pointed out that the city must approve 1,155 units in the current planning cycle, which ends in 2023, but it still has not set aside enough land to meet a third of that goal. Only 118 units of new housing have been permitted so far, none of it for very low-income households.

“Projects such as the Mill Park Center,” Olmstead wrote, “are critical to achieve the city’s housing objectives and maintain housing element compliance.”

A 2017 law allows state housing officials to report cities and counties to the attorney general for legal action if they do not adequately prepare to meet their state housing construction targets. It was used for the first time in January when Gov. Gavin Newsom sued Huntington Beach to force the Orange County city to plan more affordable housing.

Under another bill signed this week by Newsom, communities that fail to fix their deficient housing plans within a year could ultimately be punished with court-imposed fines of as much as $600,000 per month.

Grogan, the San Bruno city manager, said, “We’re working with our legal counsel to review the letter.”

The letter from the state comes after Grogan posted a lengthy statement on the city’s website about the controversy last week, in which he mentioned the possibility of a lawsuit.

“Staff has been in contact with the Developer and the Developer has agreed to postpone legal action against the City, in the hopes that an agreeable resolution can be found,” he wrote on July 26.

Mike Ghielmetti, president of the Signature Development Group, also received a copy of the letter from the state housing department. He declined to comment other than to say in an email that he “would ask the City for their thoughts prior to giving ours.”

The California Renters Legal Advocacy and Education Fund, a San Francisco organization that sues cities that reject eligible housing projects, sent its own letter to San Bruno last week threatening legal action.

Some residents of San Bruno had already predicted that the state might intervene. Richard Koenig, a resident who supported the project, told The Chronicle last month that he was very disappointed with the vote.

“That project would have helped alleviate the housing crisis in San Bruno,” he said at the time. “We need to get with the program before the state steps in to mandate what is going to happen.”

Alexei Koseff is a San Francisco Chronicle staff writer. Email: alexei.koseff@sfchronicle.com Twitter: @akoseff