I agree. Replace.Okay, I have two issues with the top spindle bushing. First is is worn where the play is about .0085" which is way too much. I will replace it.
However, the two quill/spindle bushings have more effect on drill bit runout than the pulley bushing. Did you measure spindle runout at the chuck taper?
Yes, the bushing is way too high. And yes, there are two machined bores that retain the bushing.Second is the placement. I left my measurement in the shop but you can tell by the photos it is much more than the 3/32"- 1/8" which Frank suggested. The strange thing is this drill run just fine before taking it apart for the cleanup and rebuild. In the top photo you can see how far the bushing is raised and from the bottom photo it appears it can easily pressed down into a second holding area.
The last photo shows the pulley resting on the bushing and you can see the belt would still be below the casting.
I guess my concern is if pressing the new bushing lower, will I have restricted spindle movement?
The area around the bushing between the bores is an oil reservoir. The oil port is that small hole in the head casting. There is a hole in the pulley that will align with the oil port to allow for refilling the reservoir without removing the pulley. With the bushing that high, any oil added may just flow through down the spindle/quill.
The splines are in the very bottom of the pulley shaft. I also think with the bushing that high, the spindle may feed out of the splines.
I'm not sure what you mean by restricted.
You should see the top of the spindle at/near the top of the pulley when assembled correctly.

I make alignment marks on the shaft and pulley with a dremel. The marks on the shaft line up with the flats on the shaft. The marks on the pulley line up with the set screws. This makes it very easy to line up the set screws with the flats. Use a thread locker on the set screws, but do not tighten too hard. Otherwise the pulley may wobble excessively.

Did you have any issues assembling the quill/spindle? If you're familiar with the larger drill presses, assembly is very different.
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