HARTFORD — A newly united Senate took a major step early Thursday toward ending Connecticut’s nearly 17-week budget impasse, overwhelmingly adopting a $41.3 billion, two-year plan that closes huge deficits without raising income or sales tax rates, imposes modest cuts on local aid, and provides emergency assistance to keep Hartford out of bankruptcy.

By a veto-proof margin of 33 to 3, the Senate approved the budget after a collegial three-hour debate that ended with hugs, fist bumps and hand shakes just before 2 a.m. Seventeen of 18 Democrats and 16 of 18 Republicans voted to send the bill to the House, which is scheduled to debate it later Thursday.

The surprisingly strong vote, coupled with the expectation of a similarly strong margin in the House, set the stage for a decision by Gov. Dannel Malloy to accept the compromise or risk a veto override that could color his last year in office.

He declined to speculate Wednesday morning on whether he would sign or veto a budget he had not seen. A copy was not provided to his office until mid-afternoon.

The budget relies on tax and fee hikes worth roughly $500 million per year for the biennium. It also would raid more $175 million from energy conservation funds — which largely are supported by surcharges on consumers’ utility bills — and would offer Connecticut’s seventh amnesty program for tax delinquents since 1990.

The bipartisan deal cuts deeply into operating funds for the University of Connecticut — but not as severely as a Republican-crafted budget would have one month ago.

But it does not rely on shifting a portion of skyrocketing teacher pension contributions onto cities and towns.

And it authorizes $80 million in borrowing across four years to assist homeowners dealing with crumbling concrete foundations.

“There really is, I think, a sense of extraordinarily significant achievement in what we’ve been able to reach together,” Senate President Pro Tem Martin M. Looney, D-New Haven, said of the past three weeks of bipartisan negotiations that produced the latest budget deal. “There is so much in this bill that points us int he right direction.”

“There is something in this budget for many people to dislike,” said Senate Majority Leader Bob Duff, D-Norwalk. But “we can go back to our constituents and say ‘we listened. … And we continue to fund the areas we believe are right, are just, and continue to make the state a better state.”

Senate Republican leader Len Fasano of North Haven praised lawmakers from both parties for setting aside partisan differences and saying, “Connecticut comes first. What is important is there was courage to bring the budget to life.”

Republicans Joe Markley of Southington and Len Suzio of Meriden voted against the budget. Sen. Gary Winfield of New Haven cast the lone dissenting Democratic vote.

The new budget would direct Malloy to achieve $1.96 billion in savings after the two-year plan is in force, much of it coming from state-employee concessions he already negotiated with unions. And while those targets, collectively are $114 million larger than the already aggressive goals Malloy proposed, they also are $142 million less than savings goals Republican legislators wanted to set.

In the first year, the plan would boost General Fund spending by $875 million, or 4.9 percent, over appropriations from the last fiscal year. But that growth is deceptive, because nearly $190 million of that involves extra payments to hospitals that would be more than offset by tax hikes on the industry and increased federal Medicaid payments.

Ignoring the new hospital spending, growth is 3.8 percent, and much of that is driven by surging retirement benefit and other debt costs, which are largely fixed by contract.

Spending growth in the second year of the new budget would be just under 1 percent.

Trying to keep major tax rates flat

After ordering major tax increases in 2011 and 2015, legislators recognized it would be difficult to avoid revenue increases this year given huge projected deficits.

Analysts say state finances, unless adjusted, will run $1.6 billion in deficit this fiscal year and $1.9 billion in the red in 2018-19.

Those projected shortfalls would have approached $2.3 billion and $2.8 billion, but a union concessions deal approved over the summer by Malloy, state employees and the legislature will cut projected labor costs by $700 million this fiscal year and by $857 million in 2018-19.

Most workers face a three-year wage freeze and three furlough days, along with higher health care costs, higher pension contributions and new limits on retirement benefits.

Still, lawmakers struggled to avoid raising new revenue entirely and not to gut aid to cities and towns.

A GOP-crafted budget that narrowly passed the legislature in mid-September ran into a veto from Malloy, in part because it tried to shield towns by instead cutting labor costs beyond the limits set in the concessions deal.

Republicans tried to reduce worker pension benefits starting July 1, 2027 — right after the existing benefits contract expires — and to take some of the savings now in the form of reducing pension contributions.

Malloy and his fellow Democrats in legislative leadership said that never would hold up in court, and union leadership vowed to sue on grounds it violated collective bargaining. The GOP ultimately relented and pulled the plan from the latest bipartisan budget.

But the new plan does rely on revenue from tax and fee hikes worth $494 million this fiscal year and $535 million in 2018-19.

Hospital tax goes up, income tax credits shrink

The hospital tax hike, about $344 per year, is the largest. But the state would return all of those funds to the industry — plus more — to leverage hundreds of millions in new federal Medicaid reimbursements.

The whole arrangement would leave the state $137 million ahead in each of the two fiscal years.

If the hospital tax hike is not counted, the overall tax and fee increase is $150 million in the first year and $201 million in the second.

And while lawmakers steered clear of income tax rates, they still cost middle income and working poor households $90.3 million per year by reducing tax credits.

Other tax and fee increases in the plan include:

[naviga:ul]

[naviga:li]A 45-cents per pack increase in the cigarette tax and a related increase on levies for snuff and other tobacco products.[/naviga:li]

[naviga:li]$10 million to be raised in 2018-19 by reducing tax credits to be identified later by the legislature.[/naviga:li]

[naviga:li]Restoration of an earlier proposal to tax fantasy sports betting, beginning in the 2018-19 fiscal year.[/naviga:li]

[naviga:li]A 25-cent fee hike on Ridesharing services[/naviga:li]

[naviga:li]And a new $10 increase on motor vehicle registration fees to support state parks and other recreational sites in a program titled “Passport to Parks.”[/naviga:li]

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The new budget also reduces some taxes. These cuts include:

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[naviga:li]Phasing new federal estate tax exemption levels into the Connecticut estate tax starting in 2018-19.[/naviga:li]

[naviga:li]Increasing the state income tax exemption for Social Security earnings and creating a new one for certain annuity and pension earnings in the second year of the budget.[/naviga:li]

[naviga:li]Lowering insurance premium tax rates, which would cost the state $11 million in the first year and $24 million in the second.[/naviga:li]

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Lawmakers also canceled previously approved tax cuts, primarily focused on businesses, worth $33 million per year.

Teachers lose tax break, pay more into pensions

But one of those canceled tax cuts involves retired school teachers, who had received tax cuts in each of the past two years.

Malloy and lawmakers exempted 10 percent of retired teachers’ pensions from the state income tax starting with returns filed in the spring of 2016, and increased it to 25 percent this past April. That exemption was scheduled to grow to 50 percent next spring, but the new budget suspends that change.

Present-day teachers also take a hit in the new budget. Their annual contributions to their pension fund grow from 6 to 7 percent of their salaries starting in January – a $775 yearly increase for the the average teacher and school administrator.

The state will use those increased payments, $18 million this fiscal year and $38 million in 2018-19, to reduce the state’s contribution to the pension fund by matching amounts.

Education aid spared from deep cuts

The budget would cut the Education Cost Sharing Grant — the primary state grant that cities and towns receive to help run their schools — by by $31.4 million this fiscal year, a 1.6 percent cut. However, next year, that money is almost entirely restored and distributed using an updated formula that more heavily favors the state's lowest-performing school districts.

"This not only provides our children with a good education, this budget protects local property taxpayers," said Sen. Cathy Osten, D-Sprague, Senate Democratic chair of the Appropriations Committee.

With more than three-quarters of overall state municipal aid currently going to the (ECS) grant, it should be no surprise that it took the brunt of municipal aid cuts this year. Various non-education grants will be cut next year to make up for restoring ECS funding in 2019.

The way the state funds education has faced increased scrutiny in the year since a Superior Court judge ruled it irrational and unconstitutional. In the wake of that ruline, Gov. Dannel P. Malloy called for a massive redistribution of existing state funding to benefit the most impoverished districts.

The state's 30 lowest-performing districts and three other communities would be shielded from any cuts this year, and each of the remaining 136 towns are cut by 5 percent. In dollars, this means Enfield, Stratford, Wallingford, West Hartford and Southington stand to lose the most with their cuts ranging from $1 million to $1.4 million.

In the following fiscal year, however, $30.9 million in ECS funding would be restored and a new formula used to direct more of that money to towns that have higher concentrations of students from low-income families and less ability to raise enough local tax money to pay for their public schools.

Of the $30.9 million in restored funding, just over half — $16.3 million — would go to the state's 30 lowest-performing school districts and the remainder will be distributed to other communities. Currently 66 percent of overall ECS aid goes to these low-performing districts, and under this new plan, that will rise to 69 percent by fiscal 2019, but that's largely because of the cuts the other districts will incur this fiscal year.

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