City Attorney is a dumbass. BGC for "Operations of Law" are exempt, just the same as Gunsmithing operations.
The City can just return the firearm to the lawful owner.
Now here is where it gets interesting: define "Operation of Law". Did the owner commit a crime with the firearm? Is she suspected of committing a crime? Was the firearm used in commission of a crime?
If the answer to any of the above is no then the "Operations of Law" may very well not apply.
The PD may have unknowingly violated the statute by retaining possesion of the firearm in excess of 72 hours (IIRC that is the magic # for "Temporary transfer).

That being said again, the City Attorney is making this unnecessarily complex.
Have a representative of the City with possession of the firearm meet the owner at a FFL.
Transfer the firearm in compliance with the statute.
If they don't I am curious what legal recourse the owner may have.

Unintended Consequences indeed.