I'm assuming that means, this year 2008. If that is the case, the state should pony up the money or loan the money to cover their state mandated pay increase.
These small communities set their budgets and tax rates way before the year 2008 begins.
The state HAS no money. They can only confiscate it from you. Everyone needs to live within their means. That means withdrawing the increase if it can't be paid for.