Connecticut budget deal could stave off deep cuts in October

NEW YORK, Sept 14 (Reuters) - Connecticut state lawmakers on Thursday reached a preliminary agreement on a biennial budget to fund education and local governments, which face steep cuts next month in the absence of an enacted spending plan.

The framework for the agreement was still being finalized but included funding for schools and cities, Governor Dannel Malloy said in a statement.

Democrats, who control the state House of Representatives and split power evenly with Republicans in the Senate, said they believed they could pass the budget later on Thursday night.

The aid could not come soon enough for Connecticut's capital city of Hartford, which on Thursday saw its credit rating downgraded and has said it may seek a bankruptcy filing soon without state help.

The city needs more than $45 million of state aid to meet its obligations, which include $27 million of debt service and note payments due in the month of October.

As part of the budget deal, lawmakers could require Hartford to be subject to an oversight board, according to Hartford City Council President Thomas Clarke II.

Other cash-strapped U.S. cities, including New Jersey's gambling hub Atlantic City, have been forced to accept financial oversight in the past as a condition of receiving a state bailout.

Connecticut has been struggling with high taxes, $73 billion of pension and debt obligations, people leaving the state, and falling revenues. It faces a $3.5 billion deficit over the next two years.

After the state fiscal year began July 1 without an official budget, Malloy, a second-term Democrat who is not seeking re-election, took control of spending by executive order.

Under that order, some schools and cities would see state aid slashed after Oct. 1, leaving lawmakers up against the clock to pass an official budget beforehand.

"The urgency of the present moment cannot be overstated," Malloy said. "Local governments, community providers, parents, teachers and students all of them are best served by passing a budget, and passing it now."

The preliminary deal "appears to be a balanced and responsible compromise" that included hundreds of millions of dollars in spending cuts, Malloy said. It avoids sales and income tax hikes and restores town and education aid, he added.

Connecticut was downgraded by all three major Wall Street credit rating agencies in May, making it one of the lowest-rated U.S. states.

On Thursday, S&P Global Ratings slashed Hartford's rating four notches deeper into junk at 'B-.' (Reporting by Hilary Russ, Editing by Rosalba O'Brien)