After battling to a stalemate over competing fiscal priorities, legislative leaders and Gov. Dannel P. Malloy are grudgingly confronting a new reality: They can repair a relationship fractured since a mid-September budget veto, or accept that neither side might prevail.

Legislative leaders are desperate to restore $54 million in funding for the Medicare Savings Program, reversing what has turned out to be an intensely unpopular budget cut. The governor is insisting they work with him to confront the larger problem of how to close a $207.8 million deficit.

The governor, who was shut out of the bipartisan negotiations that produced the Medicare cut, flatly refuses to help lawmakers squelch a public outcry over a single cut. His priority is to adopt a plan to avert what would be latest in a string of budget deficits that have plagued his administration.

But if legislators are feeling pressure, so is Malloy, a Democrat about to begin his final year as governor.

Time is of the essence for Malloy, because several sources say the upcoming Jan. 15 revenue forecast will worsen the $207.8 million deficit already projected for the current fiscal year. The larger that shortfall gets in the election year of 2018, the greater the temptation will be for lawmakers to tap emergency reserves or balance the budget by borrowing, kicking the problem to the next governor and legislature.

“Now I think we have to start thinking about having a broader, more comprehensive discussion,” said Senate President Pro Tempore Martin M. Looney, D-New Haven.

“That’s what it looks like this is all leading us to,” said House Speaker Joe Aresimowicz, D-Berlin. “That is the ideal, for everybody to get together and deal with all of these issues in a bipartisan way.”

In this case, “everybody” includes not just Democratic and Republican legislative leaders, but the governor as well, Aresimowicz and Looney said.

Malloy, lawmakers at odds since mid-September

That wasn’t the case in mid-September, when Malloy vetoed a budget crafted by the Republican minority that had narrowly passed the Senate and House with the help of a handful of Democrats.

The governor said the GOP plan relied on legally questionable labor savings, carved too deeply into higher education and ignored the fiscal plight of the city of Hartford. Republicans countered that the governor simply couldn’t make room for budget-balancing ideas that weren’t his own.

Legislators then crafted a bipartisan budget after the veto without the participation of the governor or his staff. It passed by veto-proof margins in late October, nearly four months after the start of the fiscal year.

Malloy signed the budget, while warning that he feared gimmicks and other flaws had produced an unbalanced plan.

By November, he projected the budget’s General Fund — which covers the bulk of operating costs — was $203 million in deficit. Comptroller Kevin P. Lembo essentially confirmed that on Dec. 1 when he reported a $207.8 million shortfall.

Medicare Savings Program v. the budget deficit

Then came the Medicare Savings Program.

Legislators used the new budget to tighten income eligibility guidelines effective Jan. 1 for the program, which uses Medicaid funds to help the low-income elderly and disabled pay medical expenses that Medicare doesn’t cover.

But leaders backpedaled furiously shortly after hearing new projections that as many as 113,000 recipients could lose some or all of their benefits. Legislative leaders agreed this week to call the General Assembly into special session on Dec. 19 to redirect $54 million from other parts of the budget to restore funding for the Medicare program.

The quickest way for the legislature to return would be a summons by the governor. With Malloy uninterested in a partial solution to the state’s budget woes, lawmakers were left with a time-consuming process to petition themselves back into session, something that could not be accomplished before Dec. 22.

Because of the unavailability of many legislators during the holiday season, Looney and Senate Republican leader Len Fasano of North Haven said Wednesday the earliest they believe the Senate could meet in special session is shortly after Jan. 1.

Fasano asked Malloy, who can call the legislature into session more quickly, to summon them for a session on Dec. 19 to address only the Medicare issue. The governor, who had agreed not to implement any changes to the Medicare Savings Program until late February, suggested they worry about the bigger problem of the deficit.

Malloy already has taken heat after the state finished in deficit each of the past three fiscal years, which has forced Connecticut to draw down an already modest emergency reserve. Connecticut has only about $210 million in its Rainy Day Fund, enough to cover just over 1 percent of annual operating expenses.

The administration says it nonetheless is willing to talk about the Medicare Savings Program, but other issues need attention as well.

Legislative leaders said they still probably will petition themselves into a special session to take place shortly after New Year’s Day. But they also said that session probably can’t be devoted solely to restoring one social services program.

Fasano chastised not only Malloy for refusing to call a Dec. 19 special session, but also Democratic leaders for not publicly pressing the governor to do so.

“And they are going to own that issue,” he said.

Still, both Republican leaders said they are willing to negotiate with Democratic legislators as well as with Malloy’s administration, both to fix the social services program and to mitigate the budget deficit.

Will tax hikes drive the GOP from deficit-mitigation effort?

The governor offered more than $300 million in options to eliminate $208 million in red ink in his statutorily mandated deficit-mitigation plan. But two-thirds of the $300 million involved tax increases, including the sales, cigarette and real estate conveyance levies.

And the single-largest spending cut he proposed involved taking another $55 million from municipal aid.

House Minority Leader Themis Klarides, R-Derby, has argued repeatedly over the past years that Connecticut has relied on tax increases far too often to solve past budget crises.

Fasano said he would consider all of the governor’s suggestions, but added, “At first look, a nearly $200 million tax increase is a nonstarter for our state. Connecticut is suffering deficits due to a sluggish economy created by years of historic tax increases passed by Gov. Malloy and Democrat lawmakers without any thought for how these taxes would hurt our state in the long run.”

Neither Republican leader identified any specific spending reductions as alternatives to the tax hikes Malloy suggested Wednesday.

Will the budget deficit get worse next month?

Further complicating matters, both sides are worried their respective priorities could be overwhelmed and forgotten if the state’s fiscal position worsens next month.

Fiscal analysts for the legislature and governor are required to revise projected revenues on Jan. 15 for the current fiscal year as well as for the next four.

Since Connecticut emerged from the last recession in 2010, revenues in general, and income tax receipts in particular, largely have failed to come in at the levels assumed when the budgets were adopted. And several legislators have said privately analysts already have warned revenue projections could be downgraded again next month.

And as the deficit gets larger, the choices become more difficult.

Malloy told lawmakers Wednesday to get serious now.

“I believe we do a disservice to the public when we defer necessary steps and fail to take decisive action,” Malloy said in a letter to legislators, “ultimately making the cost to taxpayers and damage to government services even more severe.”

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