HARTFORD (Reuters) - Connecticut, one of the wealthiest states in the nation, also has some of the highest debt levels and its capital city of Hartford is facing potential bankruptcy.

FILE PHOTO: Connecticut Governor Dannel Malloy speaks at the Democratic National Convention in Philadelphia, Pennsylvania, U.S. July 25, 2016. REUTERS/Lucy Nicholson

Now, the state faces a fiscal crisis. A budget is nearly two months late, with debt and big pension liabilities - fixed costs that constrain spending - hampering lawmakers’ attempts to reach an agreement.

Governor Dannel Malloy, a second-term Democrat who is not seeking reelection, discussed with Reuters tough decisions he has wrestled with to address a fiscal calamity decades in the making.

Malloy and Ben Barnes, secretary of the State Office of Policy and Management, talked about the state’s debt burden and whether Connecticut would approve a possible bankruptcy filing for Hartford.

Below are excerpts from the interview.

Q: Describe the fiscal health of the state, and whether a budget would be passed soon.

MALLOY: “There has been an ongoing process of making hard decisions. I think there’s some legislative fatigue over that, but we’ll get a budget.

I’m pretty proud that Connecticut’s government is over 12 percent smaller today than when I took office. I’m proud that we’re the first administration to truly actuarially fund pensions. I’m proud that we’re the administration that has now restructured our arrangement with labor and have restructured the funding formula for our long-term obligations.”

Q: Could you characterize the state’s relationship with debt?

BARNES: “There was a lot of school construction approved in the period running up to 2008 and the financial meltdown. We’ve been bonding for large projects which were approved before the bottom fell out. What we’ve added into the mix has been significant expansion of what we provide for higher education. And we’ve also put money into economic development initiatives, which we think are extremely important.”

Q: If revenues are not coming in as expected, are tougher decisions needed regarding state borrowing?

MALLOY: “You make investments in growing the economy, (like) the University of Connecticut campus.”

BARNES: “The fiscal problems that we have today are entirely driven by the overhang of unfunded pension liability. The increases that we’ve made in payments for retiree health and unfunded pension liability since 2010 are equivalent to all the taxes we’ve raised and then some.”

Q: Should the school construction program be reevaluated?

BARNES: “We have made some significant changes... The number of school construction projects that are going forward is down. We’ve definitely tightened the screws there, but the state of Connecticut has built a lot of schools over the last 20 years.”

Q: Would you approve a bankruptcy filing for Hartford?

MALLOY: “I would approve it if it’s the best way to handle their difficulties. Connecticut has not treated its cities very well, something which I’ve tried to change.”