A lot of ink has been spilled concerning the budget problems on the state level, but so far few have mentioned the budget problems on the city level.

(Reuters) - U.S. cities will face a collective budget shortfall of at least $56 billion over the next two years, with the current recession not seen hitting bottom until 2011, according to a report on Wednesday.
The collective shortfall could reach $83 billion through 2012, the league said. Cities will seek to cure revenue declines and spending pressures with higher service fees, layoffs, unpaid furloughs, and drawing on reserves or canceling infrastructure projects, the report said.

Besides the depth of the recession, the cities and counties are suffering from the state budgets. The states are cutting back on assistance to the cities in order to solve their own budget problems.

States cut aid to cities by 9 percent in 2003 and 2004 in response to the 2001 recession, according to the report.
"In comparison, the current recession is by nearly all measures more severe than the 2001 recession, suggesting that state cuts in transfers will, if anything, be more severe as well," the group said.

I'm not certain why, but when an economic recovery happens, the states and cities are the last ones to feel it. So we can expect this story to play out for a very long time.