FRANKFORT -- Kentucky tax revenues outperformed expectations in the recently ended fiscal year, leaving the state with a $194.5 million surplus on July 1.

The surplus should allow the state to cover some unbudgeted expenses, transfer $70 million to the Teachers' Retirement System medical insurance fund and give a little help to the state's most troubled pension plan, which provides retirement benefits for most state workers.

While the surplus is good news, it represents less than 2% above the $11.2 billion in tax revenue already anticipated during the fiscal year, and it will have only a tiny effect on Kentucky's long-term financial problems caused by the $42.7 billion in unfunded liabilities for its retirement plans.

Thursday's report showed that state general fund revenues grew by 5.1% during the year over 2017-18's revenues and produced nearly $11.4 billion. The state budget anticipated a revenue growth rate of just 3.3%.

State Budget Director John Chilton released the year-end numbers Thursday. He attributed the solid growth to tax changes made by the 2018 General Assembly and to the strength of Kentucky's economy.

Largely because of the tax law changes from 2018, which expanded the sales tax to some services, revenue from the state sales tax grew by a strong 9.2% during the last fiscal year. But because the 2018 law lowered

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the top income tax rates, revenue from the income tax was down 1.3%.

The 2018 tax changes also included a hike in the tax on a pack of cigarettes, from 60 cents to $1 per pack. That resulted in a 67% increase in tobacco tax revenues for the year.

Thursday's report reflects only the year-end results of the revenue side of Kentucky's budget, and the $194.5 million represents only the excess revenues. Chilton said his staff is reviewing the spending side and that review is necessary before a final figure can be determined for the amount of available surplus funds.

Chilton said he will issue a final report closing out the 2018-19 fiscal year revenue picture before the end of July.

In a separate news release, Gov. Matt Bevin, House Speaker David Osborne and Senate President Robert Stivers largely attributed the strong economy to tax and economic development policies adopted in the last two and a half years while Republicans have controlled the executive and legislative branches of state government.

"This is the kind of positive, incremental growth that will sustain the commonwealth and allow us to continue providing vital public services, while meeting our obligations to state employees by fully funding our pension systems," said Bevin, who is running for reelection this year against Democratic gubernatorial nominee Attorney General Andy Beshear.

The state's 2018-20 budget, passed by lawmakers in the spring of 2018, outlines how any surplus money is to be distributed.

The first use of such funds is to cover what is known as "necessary government expenses." These are costs that were likely to occur during the past year but were not funded within the budget. They include things like the expenses in responding to natural disasters or other emergencies. They also include costs to account for soaring costs to operate state prisons and local jails that were not fully anticipated in the budget.

The second use of surplus funds is to pay for an expense lawmakers struggled to find the money for during the 2018 legislative session -- $70 million for health insurance for teachers who retired after June 30, 2010, but who are under age 65.

The 2018-20 budget originally proposed by Bevin provided no money for this purpose, though it had traditionally been funded in state budgets. Lawmakers responded to the cries of retired teachers who were facing thousands of dollars in annual health care costs and funded the insurance for 2018-19. For 2019-20, lawmakers said the Teachers' Retirement System must simply use money from its medial insurance fund to pay for it.

But lawmakers added the provision to the budget bill that said if any surplus money is available after June 30, 2019, it be used to reimburse Teachers' Retirement up to $70 million for this purpose.

The budget mandates that any surplus beyond what's needed for the Teachers' Retirement System's medical insurance fund go to the state pension plan that covers most state workers.

Chilton also reported Thursday that the separate state road fund had a good year. The gas tax, sales tax on vehicles, and other transportation taxes generated more than $1.56 billion in revenue -- $59.5 million more than was expected.

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