The governor also said 10 banks and credit unions have agreed to help the 69,000 state employees who may soon have payless paydays by giving them loans or lines of credit.
Pennsylvania's budget year ends at midnight Tuesday, and Rendell said he was resigned to starting the new fiscal year without a spending plan in place for the seventh straight year.
The state has an estimated $3.2 billion revenue shortfall for the current year and a similar gap to fill for the 2009-10 year.
Rendell supports a mixture of cuts and higher taxes - including a three-year, 16 percent jump in the personal income tax - while Senate Republicans propose cutting spending but no tax increases.
Rendell has said that so much of the state's spending is linked to federal mandates or required for other reasons that cutting alone will not eliminate the deficit.
"Our proposal is fair and equitable," Rendell said. "It's the best balance."
Rendell said he and legislative negotiators went through 358 of about 700 budget lines during a meeting at his Harrisburg residence Monday night. They are expected to resume that process later Tuesday.
Senate Majority Leader Dominic Pileggi, R-Delaware, said the two sides remain far apart. He was critical of Rendell's approach to a compromise on spending.
"We should be spending less in the coming fiscal year than we are spending in the current fiscal year," Pileggi said. "The governor will not accept that premise and instead would like to review individual spending lines to come to a total of spending through that process. We think it's an upside-down process."
State workers will not be furloughed, but they will receive only partial pay on July 17 and July 24, after which paychecks will be withheld entirely until the impasse is solved. They will then be paid retroactively.
Companies that do business with the state also may have to wait until a budget is in place before they will be paid.
The state's welfare checks, debt payments and pensions will continue to be sent out. Agencies such as the Liquor Control Board, which is self-funded, will not be affected. State parks will not close immediately, and many highway projects, paid for in the 2008-09 budget, will continue.
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