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Municipal Crisis

In 1978, California’s initiative Proposition 13 transformed how local governments are funded and governed. Property tax revenue, one of the chief funding sources for local government and schools, was suddenly reduced statewide by 60 per cent. Proposition 13 also abolished local control over the ad-valorem property tax. 

Just one month before the 1978 election, the Hercules City Council by a one-vote margin had reduced its property tax rate due to a build-up of surplus funds. Because Proposition 13 did not specify how rates were to be reduced, the Legislature implemented a new tax allocation formula that made permanent the reduced Hercules rate.  The result was a large, permanent reduction in property tax revenue available to the City. 

The consequences for the City of this dramatic loss of revenue and local control were profound. From 1978 to 2010 the City was forced to rely on subdivider fees, cash reserves and redevelopment debt to fund its operating and capital costs. Large reserves were drawn down, and redevelopment was abolished in 2011. This condition of increasing financial austerity led to the wrongful actions by certain City officials that nearly bankrupted the City in 2011.