How the U.S. House and Senate reconcile differences in the federal stimulus package will determine how much of a shortfall Gov. M. Jodi Rell faces in her proposed biennium budget.

The U.S. Senate Tuesday approved an $838 billion stimulus bill that cut $40 billion from a $79 billion stabilization program, which will drop Connecticut's share over the next two years by $430 million, according to state analysts.

This includes $359 million that Rell wanted to use to maintain the Educational Cost Sharing grant to towns next year, one of the hallmarks of her budget plan, and $70 million in additional Medicaid funds it was hoped would cover increased use of the program.

"We are in constant touch with the congressional offices," said Jeffrey Beckham, spokesman for the state's Office of Policy Analysis, as the state lobbies for a final bill closer to the U.S. House's $830 billion, with more money for stabilization.

Beckham said if the $359 million in education aid does not materialize, the state will have to cut elsewhere in the two-year budget.

Democrats have already been critical that, based on estimates from the nonpartisan Office of Fiscal Analysis, Rell's proposed $38.4 billion budget for fiscal 2010 and fiscal 2011 is $2.6 billion short and depends on one-time expenditures to cover $3.4 billion over two years.

At some point, Beckham said, the they will have to reconcile the estimates, which will be clearer when the April tax returns are in.

The deficit for this year is estimated at $1.3 billion, of which $600 million has already been cut, with Democrats hoping to vote on more cuts by Feb. 27, although they did not have details Tuesday.

State Sen. Majority Leader Martin M. Looney, D-New Haven, said a big worry is that, as the economy tanks, the quarterly tax estimates paid by businesses to the state may have been too generous, necessitating the state to issue substantial refunds.

Rell, over the weekend, also floated a retirement incentive plan that would apply to workers at least 55 years old with 10 years experience. She wants the legislature to take action on it quickly and to put it into effect by the end of March.

Rell's budget office estimated 3,000 out of some 9,000 eligible would take a buyout that would add three years to their pension plan and continue health care, which would be exempt from future changes.

There are no details beyond that, and union representatives were taken aback that it was made public at this point, when there was an agreement to not issue statements as negotiations on job cuts proceeded.

Looney said in previous buyouts, critical departments, such as transportation, "have been hollowed out," with a lot of institutional knowledge lost. If large numbers of correctional guards or state police took up the offer, replacements would have to be hired, negating any savings.

U.S. Sen. Christopher Dodd, D-Conn., said he was disappointed with the Senate package, but voted for it, "because failure to take any action to stop our economic downturn - and quickly - would have a far worse effect. I am hopeful that as the two bills' differences are reconciled we will have the opportunity to increase the funding for Connecticut."