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To add to what Cyrus has said, Google will "choose" a version of content it finds duplicated to favour, so has clearly chosen the local. subdomain. The main website would likely fall back into favour if you were to consolidate the subdomain and redirect it to the main site, but I would definitely find out if the third party agency who developed the subdomain has done some promotion of the subdomain that you aren't aware of. There is no real problem using subdomains or subfolders for specific local rankings / campaigns. I wouldn't say you are gaming or abusing it here - you have a dupe content problem that needs fixing though. If you were to use subfolders, the duplicate content problem would remain as long as there are multiple versions of the same content, but if you were to consolidate the main site and subdomain's strength, then any subfolders you added to the one remaining site (assuming all content was unique) should inherit authority.

Come to think of it, the only thing we did do was fire the SEO company that we had working for us, and started doing SEO in house, but this doesn't make sense in terms of rapid shifts in duplicate content.

Yes, domain authority. We were tracking this ourselves using open site explorer. Thank you for the information, my suspicion was either 1) Our SEO company did as you suggested, Cyrus, or 2) They were building some good links, but google devalued a bunch of them due to algo changes, although they are not telling us which algo changes we were affected by.