HARRISBURG - After meeting with legislative leaders yesterday, Gov. Rendell said he was optimistic about passage of a state budget before the beginning of the fiscal year, but held out the prospect of furloughing state workers for the second year in a row if there was no agreement.

"I think we can have a fair, decent budget by June 30," Rendell said at a news conference to discuss his proposed 2008-09 spending plan.

But he added: "I haven't ruled out furloughing."

In the face of a budget impasse last year, Rendell furloughed 24,000 state workers. The first state government furlough was brought to a swift conclusion when Republican lawmakers and the governor reached a budget deal after one day.

Rendell said that without a deal this year, he might have to furlough workers as early as July 1. Last year, it was not until nine days after the June 30 budget deadline that Rendell furloughed workers. A Rendell spokesman said the earlier date was due to changes in federal case law. Details of the case law involved were unavailable yesterday.

House and Senate Republican leaders said yesterday that they, too, felt the two-hour meeting at the governor's residence was productive, but that they were concerned about the potential for another furlough, which they regard as possibly unnecessary.

"We are reviewing the current status of the federal law regarding furloughs," said Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi (R., Delaware). "Remember that we were never convinced that his action last year was absolutely required."

Steve Miskin, spokesman for House Minority Leader Sam Smith (R., Jefferson), called last year's furlough an act of "political gamesmanship" that used government workers and their families as pawns.

Without a new fiscal blueprint in place, the state loses its ability to spend tax dollars. Rendell at the time said he had no choice but to furlough workers on July 9 when their pay period ended.

In response to Rendell's action, the Senate passed a bill in February that would prohibit the furlough of state employees while budget negotiation continued.

Said Arneson: "We encourage the House to take that up and send it to the governor."

Rendell's $28.3 billion budget would increase spending by 4.2 percent - which the governor said yesterday corresponded with the current rate of inflation.

But pointing to shrinking state revenues, House Republican leaders called for spending cuts to make up for any shortfall.

Rendell said that while he expected state revenue collections to increase in June, he urged Republicans to support his plan to reduce the Department of Public Welfare budget.

Rendell said the state could save $100 million a year if the legislature approved his proposal for the state to take control of drug purchases for Medicaid recipients - a proposal opposed by managed-care agencies.

Rendell noted that all of his major initiatives - energy conservation and alternative energy development, expanded health-insurance coverage, and increased biosciences funding - would be funded through existing accounts and borrowing, not through the general fund.

Pileggi said that he shared Rendell's goal of reaching a budget agreement on schedule, but that the shrinking surplus and poor economic outlook for the fall would make reaching the deal "very challenging."

"We also still have a fundamental disagreement over the appropriate level of borrowing," he said.

Contact staff writer Amy Worden at 717-783-2584 or aworden@phillynews.com.