The state ended the fiscal year with a small surplus, but budget demands and a faltering national economy have the state Legislature’s budget chairmen and the state budget director concerned and cautious.

The state’s general fund took in 1.1 percent more money in the fiscal year that ended June 30, ending the year with a small surplus, according to Budget Director Mary Lassiter. But the budget for the next two years requires her office to find $180 million in savings the first year and a bit more in the second. Meanwhile, road fund revenues are down and expenses are up.

“My good news is we ended the year with a very small surplus, but we were able to do that because we’d already made adjustments (spending reductions) earlier in the year,” Lassiter told the Joint Interim Appropriations and Revenue Committee.

Half of the $22.7 million surplus will go to the Budget Reserve Trust Fund – commonly called the Rainy Day Fund – bringing its balance to $226.1 million. But the budget assumes using $191 million of that in the second year of the biennial spending plan.

If lawmakers were encouraged by a 1.1 percent increase in state receipts in July, the first month of the new budget, Lassiter cautioned them not to make too much of it.

“One month does not a trend make,” she said. Extending July figures into a trend might be dangerous, she said.

“We’re a little cautious – as everybody in this room is – because of concern about the national economy,” Lassiter said.

The road fund ended the year up 3 percent, but that’s less than any revenue growth in the past three years and quarterly projections show a steady decline in revenues. The road fund receives money through taxes on gasoline and other motor fuels and from taxes on vehicles, known as motor usage taxes. People are driving less and Lassiter said taxes on vehicle purchases have been flat and may decline.

“Folks are buying fewer cars. They’re buying cheaper cars and the value of used cars has been going down,” she said.

Rep. Robin Webb, D-Grayson, said the trend to more efficient cars and efforts to develop alternative fuels could affect how the state will fund infrastructure.

“Is our tax structure suitable as we look 10 years, 20 years, down the road for our infrastructure?” Webb asked. “We still need the infrastructure.”

Lassiter agreed the system of financing the road fund will have to be revised as more hybrid and perhaps all-electric vehicles replace gasoline-powered cars. And, said Rep. Don Pasley, D-Winchester, it’s not just declining tax revenues plaguing the road department. As petroleum costs rise, so do the department’s expenses.

Lassiter said the administration hopes to recover about $204 million in savings this year to cover the $180 million the Legislature required in savings as well as $25 million in unexpected expenses. That will be done through personnel attrition, agency savings – such as fewer miles and lower fuel costs by Kentucky State Police – and debt restructuring.

The budget anticipates savings from employee retirements, counting on as many as 3,400 to take retirement during a “window” in which they can calculate retirement benefits on their top three years of salary rather than on the top five. That window expires Jan. 1, 2009.

Thus far, Lassiter said, 1,265 employees have retired this year, most from the highway department, which has the largest number of employees. Their salaries are funded through the road taxes and don’t benefit the bottom line of the general fund.