You’re a public servant. You’re there to serve the public, not the staff. Don’t cut services unless services are not working… Raise taxes if you have to, but think about creating revenue-generating products.
Reward employees who are saving you money, innovating, building your assets. Chances are, most of your employees are not doing any of those things.
Regarding the notion that cutting salaries will lead to cut services, I think this is rubbish. I’m on furlough right now, it’s not affecting my motivation. I think though there should be a way out of the furlough for individual effort. For example, rewarding employees for great ideas that save the city money or generate revenue. I think that could be a motivator.
I will likely post about this on my blog, Conversion-Driven Government, in a few days.