The U.S. Senate threw a lifeline to Pennsylvania officials last week, approving an additional $600 million in federal Medicaid funds that will help balance the state's $28 billion budget for fiscal 2010-11, which began July 1.

But the extra money, which the U.S. House will vote on this week, won't completely fill a hole in the budget, because Gov. Ed Rendell and legislators had been counting on an extra $850 million for Medicaid. Figuring out how to reduce spending by $250 million -- or coming up with additional tax revenue -- will be their major topic at a meeting in Harrisburg this week.

But the heavy financial lifting is far from over. Legislators will return to Harrisburg in mid-September after their summer recess but they'll go home by mid-October to politick for the Nov. 2 election. Many difficult decisions will likely be put off until January, when a new governor -- either Democrat Dan Onorato or Republican Tom Corbett -- takes office and a new two-year session begins.

Among the conundrums still facing state officials:

Each year, funding for education is the largest slice of the budget pie. Allocations for preschool and K-12 classes in 500 school districts account for 35 percent of the annual budget, or nearly $10 million. Another 7 percent, or almost $2 billion, goes to higher education.

Only three areas in the budget show increases over fiscal 2009-10, and the state's subsidy for basic education is one of them. It's $5.8 billion, or $250 million more than last year. But even that was less than the $350 million that Mr. Rendell had wanted.

State aid stayed level this year for the four state-related universities (including Penn State and the University of Pittsburgh), the 14 universities in the State System of Higher Education and for community colleges. College officials had hoped for an increase, but at least they didn't get a decrease, as did many areas of state spending.

This will be an ongoing headache for legislators and for the new governor who takes office in January.

Earlier this year, when the feds rejected the state's bid to place tolls on Interstate 80, road/bridge/transit funding for fiscal 2010-11 dropped from $922 million to $450 million. Public transit systems will get $250 million and road/bridge improvements will get $200 million. That comes from increases that occur each January in tolls on the Pennsylvania Turnpike.

The state's two largest transit systems -- the Port Authority in Allegheny County and the Southeastern Pennsylvania Transit Authority in the Philadelphia area -- are being seriously hurt by the decrease. Port Authority, facing a $50 million budget deficit, will reduce service and raise fares if legislators don't come up with more revenue. SEPTA needs an additional $100 million for capital projects.

To generate more revenue, Mr. Rendell wants a new tax on gross profits of oil companies doing business in the state, saying that could raise up to $900 million for transportation work. But oil companies are against it and legislators cool to it, so his backup plan would increase the state's 31-cent per gallon gasoline tax and raise fees to renew drivers licenses and vehicle registrations.

Mr. Rendell hopes that Congress, when in a few months it enacts a six-year extension to federal interstate highway funding, will permit states to toll many highways that aren't currently tolled.

Since Mr. Rendell leaves office in January, he wants legislators to act on new transportation funds as soon as possible, rather than waiting until a new governor takes over. Mr. Corbett has said he won't approve any new taxes, which Mr. Rendell said will complicate raising the money needed to fix ailing roads and bridges. But there are doubts that legislators will approve higher gasoline taxes or vehicle fees in September, so close to the November election.

This will likely be even tougher than the transportation matter, necessitating up to an additional $5 billion by mid-2012. The Legislature enacted significant pension increases for retired state employees -- including themselves -- and retired public school workers in 2001. Those increases are due to begin in two years.

Pension funding comes from three sources: the employer, the employee and investment income. The state provides the entire "employer share" for state retirees and half the cost for school retirees, with local school districts picking up the rest.

For much of this decade, investment income was doing well, and employers -- meaning state government and school districts -- cut back on contributions. Employees kept on paying their full share.

But the severe recession that began in the fall of 2008 has sharply reduced interest income on pension investments by the State Employees Retirement System and the Public School Employees Retirement Systems.

So the Legislature must figure out a way to increase the state's share of the costs. So must local school districts, but they have only one choice -- higher property taxes.

The state House took a modest step this spring by voting to reduce pension for future state employees, but by law it cannot reduce pensions for current retirees or workers.

The need to generate up to $5 billion could require higher personal income taxes or sales taxes by mid-2012, but few legislators want to talk about such dire matters. House Republican Whip Mike Turzai of Bradford Woods has proposed selling the state system of liquor stores to private operators, a move he claims could generate anywhere from $2 billion to $6 billion that could pay for pensions.

The state has ended each of the last two fiscal years with significant budget deficits -- more than $3 billion in June 2009 and more than $1 billion this June. With the loss of $2 billion in federal stimulus funds when the program ends in January and with revenues from sales taxes, business taxes and personal income taxes still lagging due to the recession, some people fear the deficit could reach $3 billion again by next June 30.

This is the second biggest slice of the state's $28 billion budget. Welfare, education and prisons are the areas where spending has increased over fiscal 2009-10.

Welfare, Medicaid (aka medical assistance) and other social programs account for 37 percent of the budget, totaling $10.4 billion.

But this category is usually split into two parts: 21 percent, or $5.9 billion, goes for medical assistance for the poor and elderly and those in long-term care facilities; another 16 percent, or $4.5 billion, is spent on public welfare and human services programs, such as cash assistance grants for the poor.

Medicaid costs are paid for by the state and the federal government. Mr. Rendell had been counting on an additional $850 million from the feds, covering January to June, but will be getting 70 percent of that, or $600 million. It's welcome, obviously, but it still leaves a $250 million hole.

One way to adjust the budget would be to eliminate the additional $250 million that school districts have been promised for basic education in the soon-to-begin school year. But that idea will find opposition with Mr. Rendell, so talks with legislative leaders are needed.

One new revenue-raising option that's been getting a lot of attention lately is a "severance tax" on the cubic feet of natural gas being pumped from deep underground areas of Marcellus Shale, found in three-fourths of the state.

Mr. Rendell favors such a tax, which could raise up to $200 million a year, depending on the tax rate. He wants the Legislature to enact such a tax by Oct. 1.

But the Marcellus Shale Coalition, a group of 100 drillers, transporters, pipeline companies and engineers that are pumping the underground natural gas, says legislators should think twice about damaging a new industry that promises to bring thousands of new jobs. The Marcellus coalition added former Gov. Tom Ridge to its arsenal last week.

Spending for the Department of Corrections is up again this year, nearing $2 billion, compared with $1.8 billion in 2009-10. Costs are rising because the number of state prisoners continues to climb. The 27 existing prisons can hold 43,000 prisoners, but the total topped 51,000 in February, when 2,000 prisoners were moved temporarily to prisons in two other states.

New inmates continue to be sentenced, with the population expected to reach 55,000 in a few years. Construction should start this fall on a $200 million state correctional institution in Centre County, near the existing SCI Rockview. State officials hope construction will begin in the next two years on two new prisons in suburban Philadelphia and another in Fayette County.

The recession also has increased the state's need to borrow unemployment compensation funds from Washington -- $3 billion in the last two years. Starting in January, just as the new governor takes office, that money has to be repaid, with interest.

Spending here has decreased in the last few years. The parks budget went from $61.6 million two years ago to $50.4 million last year and to $46.7 million this year. Forestry spending went from $18.2 million two years ago to $17.1 million last year and is just under $12 million this year.

The Department of Conservation and Natural Resources said there are no plans to completely close any state parks -- unlike a year ago, when there was talk but no actual closings. However, cost-cutting could result in fewer campgrounds in some parks, or fewer washrooms, or fewer environmental education classes.

As for the 2.1 million acres of state forests, spending cuts could reduce maintenance of 3,000 miles of roads that wind through them.

Funding for libraries has been declining in recent years, and that trend will continue. In fiscal 2009-10, the allotment was $60 million statewide, a cut of 20 percent from the previous year. This year the amount for libraries drops to $54.5 million, a 9 percent cut.

Looking for more from the Post-Gazette? Join PG+, our members-only web site. You'll get exclusive sports content, opinion, financial information, discounts from retailers and restaurants, and more. Our introduction to PG+ gives you all the details.