Fiscal Projections and wage increases

I have put together a spreadsheet here(in MS Excel Format) which shows the effect of wage and salary increases on our budget deficit. It assumes normal, historical increases in other expenses, school funding at minimum required net school spending, and varies the wage increases from 0 to 3%. Even with no salary increases, our finances will be about $460K in the red in FY10. We are currently in FY09 ...

...and the town's fiscal year runs from July 1 to June 30. Every 1% increase in salary and wages in FY10 adds about $111K to that $460K deficit (i.e 1% adds $111K, 2% adds, $222K, etc.). FY11 with no salary and wage increases in FY 10 and FY11 is projected to have a $914K deficit. Adding various salary and wage increases percentages results in additional red ink between $224 to $681K, resulting in budget shortfalls of $1.14 to 1.6 million. The picture gets even worse in FY11. What are we planning to do about this impending sea of red ink? As far as I am aware, we have no plan. Does that seem like prudent stewardship?