GOVERNING kicked off its Outlook in the States and Localities conference this afternoon with a panel on the economic challenges that cities and ocunties are facing right now.

As you might not be surprised to hear, the news was bad. Real bad.

"The next two years will be particularly gruesome for counties and cities," said Larry Naake, execitive director of the National Association of Counties. Looking at estimated revenues for upcoming cycles, Naake said, "In 2009, it's bad. In 2010, it's horrible."

The three sources of state and local revenue -- property, sales, and income taxes -- are all down. According to Chris Hoene, the director of policy and research for the National League of Cities, this is the first time all three of those have faced declines in the 25 years that NLC has been surveying local fiscal officers.

So how will cities and counties cope? Cuts, and lots of 'em. Unsurprisingly, most localities are planning to delay infrastructure projects and reduce spending in areas like public safety and health services. They're also planning cuts in personnel spending. According to a recent NACo survey of large urban counties, 91 percent plan to cut spending, and a similar number are planning hiring freezes. But most surprisingly, a full 64 percent are planning actual layoffs.

In addition to those spending cuts, Naake and Hoene said localities will likely step up their efforts to consolidate -- not in terms of full metropolitan consolidation of government, but along the lines of "functional consolidation" of particular services. Cities and counties can increase efficiency by having one agency providing a service -- such as animal control, garbage and recycling pickups, parks and recreation maintenace, or the court system -- to the county and to all cities within that county. It's a trend that's picked up over the past decade, said Naake. "But I think you're going to see a lot more cities and counties turning to that as times get tougher."