CHEYENNE - Gov. Dave Freudenthal on Tuesday said the era of billion-dollar budget surpluses is over, and he directed state agency heads to prepare to trim 5 percent from their budgets in the next fiscal year.

Freudenthal said that if the national recession lingers, and state budget projections remain grim, he may be forced to exercise special executive powers to trim government spending.

"The times of great budgets have died," Freudenthal told a gathering of about 30 agency directors in Cheyenne.

Freudenthal said agency leaders can ease the fiscal pain by accepting the new economic reality, and by identifying areas now where they can trim. He said he wants to avoid the sudden, painful cuts that were required in the 1980s.

"We have got to think about cuts on the margins," Freudenthal said. "What can you change in your agency so we don't have to end up" with larger cuts in the future?

Freudenthal, who has a degree in economics, said he is unconvinced by recent headlines about an imminent national economic recovery late in 2009. Even if the economy rebounds, he said, Wyoming may not feel the upside until much later.

If state revenue continues to slump in the meantime, Freudenthal said he may have no choice but to trigger the 5 percent cuts in the fiscal year that starts July 1.

"I think it's going to get worse before it gets better," Freudenthal added.

Freudenthal urged department heads to view the possible cuts as an opportunity to eliminate state programs that aren't working, and to rethink their roles as stewards of public funds.

The governor also said that it is important for the public and the Legislature - which convenes Tuesday - to adopt a similar view about state spending.

Freudenthal said many Wyoming residents continue to maintain the illusion that the state is generating massive budget surpluses despite the national downturn.

"You have to change your mindset," Freudenthal told the agency heads.

Dr. Brent Sherard, director of the state Department of Health, said if cuts occur his agency will look for ways to trim costs with improved efficiency. But some reductions in state spending on Medicaid, the state-federal health program for the poor, will be required.

"We would need to do some close scrutiny to make sure those cuts had as little impact on our Medicaid clients as possible," Sherard said.

Milward Simpson, director of the Department of State Parks and Cultural Resources, said his agency has no "fluff" in the budget, and already operates with the minimum staff required to keep state parks and resources operating.

But he said the agency has operated on smaller budgets in the past, and can do so again if required by the governor. Simpson estimated the cuts would whack around $2 million from his budget.

"We are very resourceful as an agency by habit," Simpson said. "On the other hand, a 5 percent cut is definitely going to cause some pain.

"I imagine that all of my colleagues in these state agencies are going to feel the same," Simpson said. "It will be difficult."

Wyoming has enjoyed several years of budget surpluses - sometimes pushing $1 billion or more - thanks mainly to record energy prices and mineral tax revenue collected by the state.

As a result, state spending ballooned as the governor and state Legislature injected hundreds of millions of additional dollars into highways, teacher salaries and new programs.

The economic prosperity has continued despite a slowdown in the national economy. That trend now appears to be over.

New revenue estimates are due out this week from the state Consensus Revenue Estimating Group, which provides official revenue projections for state government.

The figures are expected to be significantly lower than earlier estimates, and the governor and state lawmakers have already adjusted their spending requests ahead of the general session of the state Legislature later this month.

If the downward trend continues through the 40-day legislative session and beyond, the 5 percent cuts may be necessary, Freudenthal said.

Contact reporter Jared Miller at (307) 632-1244 or at jared.miller@trib.com