In a major step toward ending Connecticut’s five-month impasse, both legislative branches on Thursday overwhelmingly approved a $41 billion biennial budget.

The early-afternoon 126-23 vote in the House of Representatives followed the 33-3 Senate approval shortly before 2 a.m.

The plan now goes to Gov. Dannel Malloy, who struck a cautionary tone right after the House vote. Noting the 11th-hour release of the nearly 900-page budget document, Malloy promised a thorough review.

Connecticut governor Dannel Malloy
Connecticut Gov. Dannel Malloy struck a cautionary tone after the state House voted to pass a budget. Bloomberg News

Top lawmakers have frozen Democrat Malloy out of talks since he vetoed a Republican-backed $40.7 billion plan last month. The governor has run the state by executive order since July 1.

“Unfortunately, our review has already uncovered egregious problems relating to the hospital tax that could put the state budget out of balance by over a billion dollars,” said Malloy’s communications director, Kelly Donnelly.

The hospital provider tax would go up to 8% from 6%, though the move would enable hospitals to millions more through increased federal Medicaid funding.

Capital city Hartford would receive the additional $40 million in aid it seeks as one step toward avoiding a bankruptcy filing, though Mayor Luke Bronin also reacted measuredly.

“Achieving the sustainable solution made possible by this budget will require the participation of all of our stakeholders, and we look forward to working with them to achieve the necessary long-term restructuring in the weeks and months ahead.” Bronin said in a statement.

Bronin has said the city also needs flexibility from bondholders and labor leaders.

A provision in the budget plan would ban Connecticut cities seeking state assistance with debt payments from filing for bankruptcy. Municipal leaders could apply for the state to assume some of their annual debt payments. Hartford would also have to sell the downtown XL Center arena to help its balance sheet.

Connecticut’s longest budget stalemate ever – even longer than the 1991 dispute that ultimately led to enactment of a state income tax – has put it in the crosshairs of bond rating agencies.

In the latest of several ratings actions over the past two years, S&P Global Ratings on Oct. 13 lowered its outlook on the state's general obligation bonds to negative from stable while affirming its A-plus rating.

Fitch Ratings also rates Connecticut GOs A-plus. Moody’s Investors Service and Kroll Bond Rating Agency rate them A1 and AA-minus, respectively.

The bipartisan package – the Senate is split 18-18 between Democrats and Republicans while Democrats hold a slim 79-72 edge in the House – would eliminate a $2.2 billion deficit.

While not raising sales or income taxes, the budget raises hundreds of millions through a hodgepodge of moves that include increasing the cigarette tax, elevating the cap on the motor vehicle tax – whose phaseout had been an earlier talking point -- and restricting property tax deductions.

The University of Connecticut would realize $130 million in cuts over two years, far less than under previous Republican versions.

Malloy’s veto last month followed high drama that erupted when a handful of moderate Democrats crossed the aisle, upset over language they saw in an implementer bill. Since then leaders of the caucuses have been meeting frequently in windowless rooms at the state capitol in Hartford.

“We didn’t know whether it was sunny, cloudy or raining,” said Senate Democratic leader Bob Duff, D-Norwalk. “It could have been snowing, for all we knew.”

A sluggish state economy combined with high debt, pension liability and fixed costs have hamstrung Connecticut, where revenue projections have become a moving target.

“Connecticut's budget stalemate comes amid a structural budget imbalance, tax receipts coming in below projections, and growing fixed costs,” said Moody’s.

Connecticut is one of several states struggling with pensions, according to Stephen Eide, a senior fellow with the Manhattan Institute for Policy Research.

“Responsibly managing a defined-benefit retirement system requires a willingness to fund the system adequately as well as the ability to do so,” Eide said in his report, “Rust Belt Cities and Their Burden of Legacy Costs,” released Wednesday.

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