MacOS-iCloud interop not working as expected
I have a one year old Mac Mini runnning MacOS Ventura 13.2.1. I also have an iCloud subscription, and an iPhone 13 running iOS 16.5.1(c). My Mini has 256 gb of SSD, and I've subscribed for 2 tb of storage in iCloud. The totality of my data is far in excess of 256 gb, but far less than 2 tb.
It's my understanding that MacOS and iCloud should be working together as follows: A copy of each and every one of my data files should be stored on iCloud at all times. A subset of my files should be stored locally on the Mini. MacOS should free up local storage space as needed by deleting local copies of files (but leaving them on iCloud, of course). Also, MacOS should try to ensure that the files stored locally are my more commonly accessed files, so they can be accessed more quickly.
This, however, does not seem to be happening. My local storage is all but maxed out, and I get occasional messages saying that I need to do something to free up space. (Again, it's my understanding that this should be happening automagically.). One particulary annoying manifestation of this is that my Photos app on my Mini is no longer being updated with new photos as I take them with my phone. The app says "Not enough local storage." (I do see these photos on iCloud, so the interop between the phone and iCloud seems to be working fine.)
I've looked everywhere that I can think of on both my MacOS and on iCloud, and I can't find a setting that I might need to adjust to get this working.
Any help? Is my understanding flawed? If not, can anyone point me to a specific setting where I can get this working?
Thanks.
Mac mini