Two other thoughts. One, when I used to work on a lot of big projects, we would know when there were going to be layoffs. I think that management used this to keep everyone straight, those who didn't care slacked off anyway. Those that did care made sure they kept their noses clean.
Two, in thinking deeply about the OP's situation, how about this (this may be a bit late, though). "Bill, you have been with us a long time and you have been a good team player, we appreciate it, we have looked at our 6 month outlook and there is just no way that we can keep you on the payroll. Bill, this decision has not been easy for me, but Friday will be your last day. Do you have any creative ideas of how we can keep you on, are there any projects coming up that you know about, that we may be able to go after...?"
Well, the wording didn't come out the way I had meant it, but the idea is, see if the employee is interested in helping to be a solution to the lack of work. You never know who they know and what ideas you might be able to dream up. If I had an employee that I had no work for, but didn't want to loose or starve, I'd ask him if he was willing to cut lawns, paint, or whatever (while on payroll) to keep him going. I'd also ask the employee if they were willing to reduce their work hours as a temporary approach; some people would rather work 30 hours a week, then collect UI.
So how did it all turn out? Based on your demeanor on this forum I'm going to assume that you both acted like gentlemen and that the employee understood.