It’s no secret Gov. Dannel P. Malloy is proud of the two year budget he signed earlier this year.

His decision not to balance the budget on the backs of municipalities, is something he touted in a speech Wednesday morning at the Capitol to an audience of newly elected local officials from Connecticut’s small towns.

“I can ensure you in formulating my approach to the budget I very much had you or the folks who occupied the positions before you in mind,” Malloy told the Council of Small Towns. “That’s why Connecticut went a very different direction than other states in the nation.”

He said he decided early on that the state couldn’t cut its way out of the $3.7 billion deficit and it couldn’t tax its way out of a deficit that large. And in the process, “I absolutely did study what other state’s were doing,” he said.

But what prepared him to deal with the budget more than anything else was his 14 years as mayor of Stamford.

“Having served in local government, more than anything else was one of the best preparations for doing what I needed to do and that was to not go down that road,” Malloy said. “To not replicate what had happened in this state for the last 8 years and not to replicate what was going on in other states like New York and New Jersey.”

The decision to hold town’s harmless for the $540 million shortfall over two years, in Education Cost Sharing funding was especially appreciated by municipal leaders.

It was a decision Malloy made early on in the budget process.

But local elected officials worry what will happen in 2012 when Malloy asks the General Assembly to focus on how education is financed. Typically, the Education Cost Sharing formula is one of the largest state grants small towns receive.

Berlin Mayor Adam Salina told Malloy that it’s every small town’s biggest fear that revising the ECS formula will leave some of the smaller towns behind.

“I understand that fear,” Malloy said. “I think we can handle that, but we also have to understand we’ve got to do something better in our urban areas to educate our young people.”

He said the workforce in Connecticut is rapidly aging and if the state can educate all of its children it has a better chance of improving its economy.

“If we educated all of our children, including in our urban environments where we are experiencing 40 to 60 percent failure rates, if we educated all of those children well and gave them the skill set or the education that comports or matches the needs of the state of Connecticut we could guarantee full employment in our state.”

Malloy said he’s struggling with how does the state support education in every community “regardless of size” but how do we begin the process of concentrating on less than 30 school districts “where we really need to turn things around.”

Bart Russell, executive director of C.O.S.T., said the Education Cost Sharing formula accounts for about 60 to 70 percent of the budgets of many small towns. He said smaller suburban and rural towns represented by his organization have always felt the current formula favors more urban communities.

However, the board of directors of C.O.S.T. was told by a state official years ago that the only way suburban and rural towns would do better is if more money is put into the formula and “everybody’s boat rises.”

“We never really pursued efforts to try and modify the formula because he said any efforts you try to pursue there will be winners and losers,” Russell said. “Politically that will be very difficult to facilitate.”

Russell said the governor was very straight forward with his remarks regarding the 30 neediest school districts in the state, which he understands, but in a day and age of declining revenues, “there really isn’t any other place to go other than to increase property taxes.”

“We’re concerned, but we’re also prepared to make the case we should be held harmless,” Russell said. “If efforts are going to be made to address these 30 districts they shouldn’t come at the expense of the smaller towns. We should figure out a way to get them revenue from another source.”

Malloy said when he was mayor he joined the Connecticut Coalition for Justice in Education Funding lawsuit, which argues that it’s every students’ constitutional right to have an adequately funded education. The Supreme Court decided in favor of the municipalities and sent the lawsuit back to the trial court. The case will be argued in 2014, but plaintiffs are hoping the state will reach a settlement before then.

“I still support that argument that recognizes in a more diverse population grouping expenditures are going to have to be higher because you’re dealing with different issues than you are in other communities,” Malloy said.