While the national media has focused on state budget face-offs between government unions and governors such as Wisconsin’s Scott Walker, municipal officials like Mr. DeStefano are engaged in their own budget warfare. Wages and benefits account for 30% of state general fund expenditures, according to data from the National Governors Association. But U.S. Census surveys show that in the typical town or school district, employee pay and benefits can consume from 70% to 80% of the budget.

Pensions are an enormous part of the problem. While pension payments now consume about 4% of state budgets, many municipalities are already spending 15% to 20% of their finances on pension costs. Earlier this year, California’s Little Hoover Commission, a government oversight agency, observed: “Barring a miraculous market advance and sustained economic expansion, no government entity—especially at the local level—will be able to absorb the blow [from rising pensions] without severe cuts to services.”…

Many cities that have employed budget gimmicks in the past have run out of alternatives. To balance its 2010 budget, Providence, R.I., borrowed some $48 million (using its fire stations as collateral); it also drained most of its reserve fund, which shrank to $3 million from $17 million in one year. But the city remains under severe budget pressure—its annual retiree costs now amount to an astounding 50% of its tax collections, according to a new study from the Rhode Island Expenditure Council.