By Hilary Russ

By Hilary Russ


NEW YORK (Reuters) - Connecticut Governor Dannel Malloy on Thursday vetoed the $40.7 billion biennial budget passed by lawmakers earlier this month, saying the bill would undermine the state's fiscal stability, education system and economic development.


Malloy, a second-term Democrat who is not running for reelection, had said he would not approve the Republican-supported budget.


Without a budget, which is now nearly three months overdue, the state could implement severe cuts on Oct. 1 under an emergency spending plan put in place by Malloy.


Republican lawmakers, who do not control the legislature but won support for their budget from a handful of Democrats, have said they may try to override the governor's veto, which was expected.


As the state continues to wrangle over how to close a 2-year, $3.5 billion budget gap, some Connecticut cities are in the firing because of reduced state aid.

Credit ratings agency S&P Global Ratings on Thursday put nine cities and a school district on alert for possible downgrades.

The warning "reflects Connecticut's ongoing budget impasse and brinkmanship, which could reduce significant amounts of municipal aid payments to local governments," said S&P analyst Victor Medeiros. "The credit quality of these municipalities could deteriorate further due to weaker reserves and liquidity concerns."

The cities - which include its largest, Bridgeport, and New Haven - are likely to dip into their reserves to offset losses in state aid.

The drain on reserves would "make their financial position all the more precarious," Medeiros said.

The capital city, Hartford, was not on the list but has been downgraded four times in the last few weeks.

On Wednesday, it fell multiple notches deeper into junk territory as it faces a potential bankruptcy.

Under the Republican plan, Hartford would have lost $6.8 million dollars of state support "at a time when its financial future is in peril, almost certainly forcing it into bankruptcy," Malloy said in his veto message.

Malloy also took issue with proposals to cut state public pension benefits, which could lead to expensive court challenges from public employee unions, and an education funding plan that he said was inequitable.

State Senate Republican President Pro Tempore Len Fasano said in a statement that the veto had "put Connecticut in chaos."

The veto means that cuts under Malloy's "draconian executive order will remain in effect and create destruction for low and middle income families" unless lawmakers vote to override it, Fasano said.

(Editing by Bernadette Baum and Richard Chang)