As Gov. Dannel P. Malloy struggles to contend with a looming budget deficit, a perennial source of municipal aid to towns has been put on the chopping block.

A proposal Malloy released Wednesday to address a potential $390 million shortfall in the current fiscal year includes withholding final 2017 payment to towns from the Mashantucket Pequot/Mohegan Fund.

The fund, established in 1993, directs more than $61.7 million from casino gaming revenue from the state general fund to municipalities each year in three equal payments, on Jan. 1, April 1 and June 30.

Each town receives a different amount of money based on various factors that indicate their wealth, including population, the value of state-owned property, private colleges and hospitals, the net grand list and per-capita income.

The payments to five towns that host or sit adjacent to casinos — Ledyard, Montville, North Stonington, Norwich and Preston — receive $750,000 per year in addition to the amount allocated by the formula, and another $1.6 million gets distributed among member towns of the Southeastern Connecticut Council of Governments and then certain towns in other parts of the state.

The payments have never before been withheld as a deficit-mitigation measure, according to Betsy Gara, the executive director of the Connecticut Council of Small Towns.

But with a $390 million shortfall in income tax receipts for this fiscal year, the governor has proposed drawing from multiple normally reliable state funds, now including the Mashantucket Pequot/Mohegan Fund.

The so-called Pequot fund proposal was one part of the plan Malloy released Wednesday, which also would empty the state's $235.6 million budget reserve fund and move money from 50 accounts across state government into the general fund, including $500,000 from Harkness Memorial State Park.

Unlike some of the other proposals in the deficit-mitigation plan Malloy revealed Wednesday, withholding the June 30 Pequot fund payments would require approval from the legislature.

If lawmakers approve the measure, towns in southeastern Connecticut could stand to lose out on as little as $2,781 in Lyme, and as much as $637,435 in Norwich.

Groton, which already faces millions of dollars in state budget cuts in the 2018 fiscal year, is expecting a $445,369 payment from the Pequot fund on June 30 as part of its 2017 income.

Without it, Groton Town Mayor Bruce Flax said, the Town Council would have to discuss with Town Manager Mark Oefinger where to cut money.

But it's late in the fiscal year, Flax said.

"First off, how can you do that?" he said. Groton already took a $250,000 midyear cut from the state five months ago, he said.

If the town is forced to dip into its reserve, the problem also affects the next fiscal year, because Groton must replenish whatever it spends from that fund, he said.

Montville Mayor Ronald McDaniel, who said he has fought for more money from the Pequot fund for years, bristled at the possibility that the town, which hosts the Mohegan Sun casino, might lose part of the payment it was promised this year.

"To do this so late in the fiscal year, when there’s really no time to make any adjustments in our current budget process, is just unconscionable," McDaniel said.

Trying to get a clear picture of how much the fund will contribute to the town is "an absolute shell game" in a normal budget year, and will be made even more difficult if the state decides to cut back on the amount it has promised, he said.

Preston First Selectman Robert Congdon said he plans to contact his town's state legislators to voice objection to the proposal.

"That would be devastating," Congdon said. "How can you expect municipalities to operate when you can't rely on your state government?"

New London Finance Director Don Gray said he was poring over the city’s financial books trying to project out through the end of the year, “to see what it is actually going to do to us.”

He said the finance department will have to keep a sharp eye on any end-of-the-fiscal-year spending requests. More importantly, Gray said, the governor’s last-minute effort to cut funding raises questions about what the future holds. The city has included $1.7 million in expected revenue from the fund in its proposed 2017-18 budget.

"Can I believe them?" Gray said. “Do we budget that whole amount and have them take away a third or more? That’s the concern now. And, unfortunately, this is not the first time the governor has done this to cities and towns. It’s extremely unfair to municipalities."

The Pequot fund proposal's future is uncertain. At a news conference Thursday morning, state House Speaker Joe Aresimowicz, D-Berlin, and Minority Leader Themis Klarides, R-Derby, were skeptical of municipalities' ability to handle a last-minute cut in their 2017 revenue.

"We can't promise them one thing and then pull the rug out from underneath them," Aresimowicz said, according to The Connecticut Mirror.

State Sen. Paul Formica, R-East Lyme, a co-chairman of the legislature's Appropriations Committee, did not say whether he would vote for the measure if it comes before the Senate.

"These are all tough, difficult decisions brought about by the fact that we have much less revenue, creating much larger deficits in a continuing spiral," Formica said. "Yes, this is difficult, and devastating in some cases. It's going to be a hardship ... the fact is we have to stop getting to this point."

 m.shanahan@theday.com