HARRISBURG -- The state House has given preliminary approval to significant changes in underfunded pension systems for state workers and public school employees, but taxpayers and homeowners could still face higher taxes to pay for the pensions.

House Bill 2497, which could get a final House vote today, is designed to ease the financial burdens required to pay retirees of the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS).

Currently, both systems are facing a costly financial "spike" in mid-2012 because retirement benefits are due to rise at a time when investment income is down because of the recession and school boards are trying to control property taxes.

The new bill, by Rep. Dwight Evans, D-Philadelphia, is designed to "smooth out," or lessen the spike in costs, at least for the next three years. The bill, which still needs Senate approval, also would trim benefits for future state and school employees -- meaning those hired in 2011 and thereafter.

But pension costs, even under this new bill, will still rise significantly by 2015.

And school officials from throughout the Pittsburgh area have warned that either huge tax hikes or significant cuts would have to be made to programs in order to fund the looming spike in pension contributions.

Tom Gentzel, executive director of the Pennsylvania School Boards Association, said the proposed legislation is "a step in the right direction" but does not include measures to solve the entire problem of the huge debt in the system.

He said the bill doesn't really avoid the big jump in employer contributions, but simply delays things until 2014-15 -- when pension costs are due to hit 21.20 percent of a district's payroll.

The bill also doesn't make significant changes to the current defined benefit plan for retirees.

"It is making some changes to the pension benefit structure, pulling back some of the pension enhancements approved 10 years ago, and that's a good thing," Mr. Gentzel said. "But we still think that structural changes need to be made. We don't think the defined benefit plan works."

The PSBA has proposed a hybrid pension plan for new employees to PSERS that would include both a contribution plan and a defined benefit plan. The association has also urged that another revenue source for the fund in addition to state, school boards and employee contributions. That could mean creating a new tax.

However, the Pennsylvania State Education Association, which represents teachers, supports Mr. Evans' legislation, which includes an amendment to increase the vesting period from five to 10 years for new employees or to require higher contributions. The amendment also increases retirement age (to 65, from the current 60 or 62) and prohibits lump-sum withdraws from the plan.

Wythe Keever, a PSEA spokesman, said his organization considers the amendment "a balanced solution for addressing the pension crisis."

"Although we would have preferred not to have any benefit reductions, we think it's a balanced compromise to offset the unprecedented cuts that have been proposed to academic programs and the teacher furloughs due in part to districts' attempts to fund PSERS."

Mr. Keever said the teachers union would continue to oppose any effort to introduce a 401K-type or defined contribution pension plan for new employees, as some officials have discussed.

House officials said the bill is designed to "mitigate the skyrocketing employer contribution costs," meaning costs paid by the state government (i.e., taxpayers) and by school boards (which impose property taxes on homeowners in each school district.)

As things stand now, the state's cost for SERS pensions -- for state employees, legislative staff and elected officials except judges -- are due to jump from $489 million now to $1.68 billion in two years -- a spike of 245 percent.

The Evans bill would lessen the spike by reamortizing current borrowings (similar to a homeowner refinancing his mortgage), thus stretching the payments out much farther into the future.

Under the Evans bill, for PSERS, the employer contribution rate for 2010-11 would be 5.64 percent instead of 8.22 percent (as it would be if nothing is done); for 2011-12, school boards would contribute 8.72 percent of payroll instead of 10.59 percent; for 2012-13, it would be 12.22 percent of payroll instead of 29.22; for 2013-14, it would be 16.71 percent of payroll instead of 32.09 percent.

For state retirees, the percentage of payroll, under the bill, would be 5 percent in fiscal 2010-11 instead of 5.64 percent; for fiscal 2012-13 it would be 11.50 percent instead of 26.66 percent.

The Senate will review the House bill if it passes today. "We've said generally that any reduction in the otherwise mandated employer contributions would have to be accompanied by reforms in the benefit structure of the pensions involved," said Senate GOP spokesman Erik Arneson.

The Commonwealth Foundation, a conservative group, blasted the pension changes as "generational theft," meaning the children and grandchildren of current taxpayers will have to pick up much more of the cost of pensions for state and school retirees.

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