I was hesitant to believe this, but Bryan explains the whole thing over on his Tumblr, for those who want it right from the source.
It is really disappointing that Nick just dropped the budget cut news on them like that, but admirable of the crew that they decided to stick together and make a clip show rather than fire a bunch of people. I also liked the explanation that the crew tried to make their clip show like the one on Samurai Champloo, with the cast narrating parts and such -- I think I remember that episode and it was kinda cute/funny. So, for me, I'm glad they tried the best they could with what they had to do. 'Course I won't see this episode until it airs on tv, so it'll be a while before I can see if it worked or not.
As for Nick, they've been dropping the ball with Avatar almost since it began. I have no words, this is just the newest entry on a very long list.