Hercules teeters on brink of bankruptcy Failed civic development projects have left town in economic distress

The abandoned Sycamore North development is seen behind a neighborhood in Hercules, Calif. on Tuesday, March 27, 2012. Residents of the cash-strapped city will vote on an emergency sales tax increase measure in the June election. less The abandoned Sycamore North development is seen behind a neighborhood in Hercules, Calif. on Tuesday, March 27, 2012. Residents of the cash-strapped city will vote on an emergency sales tax increase measure in ... more Photo: Paul Chinn, The Chronicle Photo: Paul Chinn, The Chronicle Image 1 of / 8 Caption Close Hercules teeters on brink of bankruptcy 1 / 8 Back to Gallery

If there's a symbol of California cities' economic hangover, it's a pair of four-story, half-finished, plastic-wrapped apartment buildings in Hercules.

The city sank $38 million into those buildings, a 144,000-square-foot redevelopment project gone awry. Last week, the City Council sold the buildings for $425,000.

"That project was a black hole. We couldn't stop putting money into it," said Hercules Mayor Dan Romero. "It would have doomed the city. We had to stop."

But the buildings, called Sycamore North, are only a sliver of Hercules' woes. The quiet town on San Pablo Bay is awash in failed developments, lawsuits and pricey consultant bills for projects that were never built. The result is that Hercules has become the latest Bay Area city teetering toward bankruptcy.

Hercules officials used the dreaded "B" word last month during a legal battle over a missed bond payment. And although city officials say they have since dodged the immediate threat of bankruptcy, the city's financial problems are far from over.

Emergency tax

The city placed an emergency half-cent sales tax on the June ballot in hopes of raising $450,000 a year - a move that, even if it passes, virtually everyone agrees will not solve the city's long-term financial shortfall. For example, this year the city expects a $1.6 million structural deficit even after cutting more than $6 million last year.

"We don't think (the tax) is enough to balance the budget. We're pretty skeptical," said Deputy City Manager Liz Warmerdam. "But it's better than nothing."

Hercules already has made deep cuts to its budget, hacking its general fund from $18 million to $12 million. Over the past year or so, the city has laid off 40 percent of its staff, slashed salaries by 15 percent, eliminated its farmers' market, Fourth of July parade and its annual Cultural Festival, cut library hours and raised prices for Parks and Recreation Department services, including day care.

Perhaps no department was hit harder than police. The city cut the number of officers from 30 to 20, bringing staffing levels to 1995 levels, when the city's population was about a third less than the 24,000 it is now.

Few police officers

The result is that only two officers and a sergeant are on duty most shifts. Response times are slower, and investigations often lag, said Hercules Police Officers Association President Detective Alex Abetkov.

"We have to explain to people on a daily basis that even though (a particular crime) is the most important thing going on in their life, we don't always have time for it," he said. "I've said 'I'm sorry' more times in the past year than I have in my entire career."

The police union supports the sales tax and has so far cooperated with the city on the cutbacks, in hopes of helping the city regain some financial stability.

"We're in favor of anything that helps stop the bleeding," he said. "But I think we need to hit bottom before we can start getting better. The problem is we don't know where that is. It's scary."

Among the options that have been brought up is dissolving the Police Department altogether and contracting with the Contra Costa Sheriff's Department.

Crime increasing

City Councilman William Wilkins said if the sales tax passes, he'd like to use the money to hire more police. Abetkov said it's too soon after the cutbacks to see a link to crime rates, but Wilkins said crime, especially burglaries, is increasing.

"Criminals know our police force is down," Wilkins said. "We need to replenish our forces. That's a priority."

Hercules' descent into financial free fall started during the real estate boom, when it borrowed more than $135 million for redevelopment projects. City leaders' rationale was that the projects would spur further development, and an influx of new residents would fatten the property and sales tax revenues.

But those bonds are costly: In all, the city owes about $8.5 million a year to repay its bond debts.

Among the projects the city gambled on - but never completed - was a baseball field outside city limits for which the city spent $850,000 on consultant fees; a 17-acre entertainment complex called Cinema Town; and Sycamore North, an apartment and retail complex left unfinished when the city ran out of money.

City Hall turmoil

When the real estate market crashed, the city was left with a slew of properties it bought at peak prices and plummeting property tax revenue. Combined with political turmoil at City Hall, the city slid into a morass of infighting, finger-pointing and staff turnover.

Last spring, voters recalled two City Council members and the mayor resigned. The city manager, city attorney and finance director left, too.

The Contra Costa County grand jury took issue with Hercules' finances, releasing two reports questioning the city's transparency and expenditures.

In August, Hercules became the third California city in the past two years to undergo an audit by state Controller John Chiang (the other two are Bell and Montebello). The "B" word is also being bandied about in the small Sierra Nevada ski resort town of Mammoth Lakes, which announced this week that it will follow Stockton's lead and go through the state mediation process mandated before governments can declare bankruptcy.

"The audit was launched not only because of serious problems in the city's financial reports, but we also have serious concerns about the reliability and accuracy of the information reported to us," said Jacob Roper, spokesman for Chiang.

Residents rally

If the audit uncovers any wrongdoing, the controller will send the information to the relevant agency for enforcement and possibly fine the city $5,000 for late filings.

Another blow came last month, when Hercules faced a $4.1 million lawsuit from a bond insurer after it defaulted on a bond payment. Hercules officials recently settled the case after warning that the city would be forced into bankruptcy if it had to hand over $4.1 million quickly.

Selling Sycamore North was also a difficult decision for city officials. Ideally, they would have liked to keep the property, finish construction and eventually reap some benefits from the development, but the city needs cash now to pay its creditors, Warmerdam said. Other city-owned properties are also for sale.

But despite the seemingly endless stream of bad news, Hercules residents have rallied to help the city. The library foundation, for example, has raised more than $40,000 to maintain longer hours after the city cut hours back.

"The community has really stepped up. They've donated, they've volunteered when we've had to cut back," Warmerdam said. "They've helped fill the void."