AB 138 requires the state and most state bargaining units to prefund retiree health benefits (OPEB) and sets a uniform policy goal: employers and employees should each shoulder 50 percent of actuarially determined normal costs. The bill specifies detailed, unit‑by‑unit employee contribution schedules, requires matching employer contributions, and creates mechanisms to adjust those percentages based on actuarial valuations.
The statute also builds in temporary suspension windows (notably the 2020–21 fiscal year and several 2025–27 intervals for specified units), caps on annual adjustment amounts, a nonrefundable dedicated fund for deposits, and a carve‑out that lets collective bargaining agreements control if they conflict — subject to legislative budget approval when new expenditures are required. For compliance officers and budget officers, the bill shifts long‑run OPEB policy toward prefunding while layering in operational complexity and contingent budget relief.
At a Glance
What It Does
The bill imposes mandatory employee contribution schedules for multiple State Bargaining Units and requires the state to match those contributions. It sets a 50% employer/employee cost‑sharing target of actuarially determined normal OPEB costs and creates rules for annual adjustments, including a 0.5 percentage‑point annual cap on changes.
Who It Affects
Applies to employees eligible for state health benefits across named bargaining units (Units 1–21 as enumerated in the text), the judicial branch, certain non‑bargaining state employees, and the state as employer; it also involves the Department of Human Resources in setting contribution percentages where employees are excepted from bargaining definitions.
Why It Matters
It institutionalizes prefunding across discrete bargaining units and ties future contribution changes to actuarial outcomes, meaning payroll, HR, and budget offices must track unit‑level schedules, suspension windows, and actuarial triggers — all of which materially affect near‑term budgets and long‑term OPEB liabilities.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
AB 138 makes prefunding retiree health the default for a large swath of California state employees by naming bargaining units and setting a shared objective: employers and employees should each fund half of the actuarially determined normal cost for retiree health. Rather than a single, uniform schedule, the bill lists individualized timetables and phased employee contribution increases for each bargaining unit (and the judicial branch), so units reach the 50% target by different dates.
The variety of start dates and phased amounts is a feature: the legislature tied contribution timing to past and negotiated rhythms across groups.
The statute pairs every employee schedule with a state match; for many units the employee percentages rise incrementally (for example, small increases in 2017–19 that accumulate to multi‑percent contributions by 2019–20). AB 138 also builds two kinds of relief valves into the prefunding regime.
First, it authorizes temporary suspensions of employee and, in some cases, employer contributions for specific fiscal years (notably the 2020–21 suspension and several suspensions covering 2025–26 and 2026–27 for certain units). Second, it permits automatic upward or downward adjustments to both employer and employee percentages when actuarial valuations show total normal costs have moved beyond a defined threshold.Those actuarial adjustment rules are mechanical but constrained: adjustments only take place when the actuarially determined total normal cost changes by more than one‑half of one percent from the baseline, and any increase or decrease to either party’s contribution in a given fiscal year is limited to 0.5 percentage points.
The statute specifies effective dates for different units’ adjustment cycles (several reference July 1 of a fiscal year, while some specify October or other dates), so the timing of valuation results and payroll cycles matters in practice.Operationally, contributions flow into the Annuitants’ Health Care Coverage Fund and are explicitly nonrefundable to employees or beneficiaries. Where a memorandum of understanding (MOU) or addendum negotiated under Section 3517.5 conflicts with the statute, the MOU controls — but if the MOU would require state expenditure, those provisions only take effect if the Legislature approves funding in the Budget Act.
The Director of the Department of Human Resources also has delegated authority to set contribution percentages for employees not covered by the listed bargaining units, bringing non‑bargaining officers and other excepted employees into the prefunding framework under administrative direction.
The Five Things You Need to Know
The bill sets a 50% employer/employee cost‑sharing goal for actuarially determined normal OPEB costs, but implements that goal via unit‑specific phased employee contribution schedules rather than a single statewide rate.
Many units see automatic phased increases in employee contributions through 2019–2020 (examples include totals of 2.0–4.4 percent of pensionable compensation by 2019), paired with equal state matching contributions.
The statute authorizes temporary suspension windows: employee contribution suspensions in 2020–21 for many units, and additional suspensions of both employee and employer contributions for several units covering fiscal years 2025–26 and 2026–27.
Contribution adjustments to restore 50% sharing are triggered only if actuarial total normal costs shift by more than 0.5 percentage points from the baseline, and any single‑year change to either employer or employee percentages is capped at 0.5 percentage points.
Contributions are deposited into the Annuitants’ Health Care Coverage Fund and are nonrefundable; a negotiated MOU can supersede the statute where it conflicts, but any MOU‑driven spending still requires Legislature approval in the Budget Act.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Prefunding goals and deadlines by bargaining unit
Subdivision (a) lists which bargaining units must prefund retiree health and sets unit‑specific target dates for reaching the 50% cost‑sharing goal. Practically, this creates a staggered implementation across the state workforce: some groups have earlier targets (for example, the judicial branch by July 1, 2017), others later (many units by July 1, 2020). For payroll and budget planners this means different units will hit full prefunding mechanics at different times, requiring unit‑level monitoring rather than a single statewide rollout.
Explicit employee schedules, state matching, and temporary suspensions
Subdivision (b) contains the detailed percentage schedules for each named bargaining unit and the judicial branch, specifying step‑up increases by fiscal year (most increases occur between 2016–2020). Each schedule ties an employee percentage to a state match. The subdivision also enacts temporary suspensions for particular fiscal years (notably 2020–21 and several 2025–27 windows) that either suspend only employee withholding or suspend both employee and employer contributions depending on the unit. HR/payroll systems will need logic to implement these suspensions accurately by unit and period.
Actuarial trigger, adjustment cadence, and 0.5% annual cap
Multiple paragraphs require adjustments to employer and employee contribution percentages to maintain 50% sharing when actuarial valuations show total normal costs moved by more than 0.5 percentage points from a defined baseline. The statute prescribes when those adjustments may begin (varying by unit) and limits any single‑year change to 0.5 percentage points. That combination of a tight trigger and a per‑year cap smooths large swings but can delay full actuarial correction, with implications for long‑term funding adequacy and near‑term predictability.
Coverage scope and fund mechanics
Subdivision (c) makes the rules applicable to anyone eligible for state health benefits, including permanent intermittent employees. Subdivision (d) directs that contributions be deposited into the Annuitants’ Health Care Coverage Fund and declares those deposits nonrefundable to employees or beneficiaries. This creates a dedicated pool for OPEB prefunding and removes the ability of individuals to reclaim contributions, which matters for payroll accounting, refunds, and pension administration.
Interaction with collective bargaining and administrative authority
Subdivision (e) states that a negotiated MOU or addendum controls over conflicting statutory language; however, if the MOU would require the expenditure of funds, those provisions do not become effective unless the Legislature approves funding in the annual Budget Act. Subdivisions (f) and (g) give the Director of the Department of Human Resources authority to set contribution percentages for employees excepted from the bargaining‑unit definition and for certain non‑bargaining state officers, enabling administrative incorporation of excluded employees into the prefunding regime without separate legislation.
This bill is one of many.
Codify tracks hundreds of bills on Employment across all five countries.
Explore Employment in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Future retirees and annuitants — prefunding increases the likelihood that retiree health obligations are supported by invested assets rather than pay‑as‑you‑go appropriations, improving benefit security for eligible retirees.
- State fiscal managers and credit stakeholders — a move toward prefunding reduces disclosed unfunded OPEB liabilities over time and can improve actuarial and budgetary transparency if contributions are adhered to.
- Bargaining agents that negotiated schedules — several units obtain predictable phased schedules and explicit employer matching, which can be used in negotiations to lock in cost‑sharing ratios and timing.
Who Bears the Cost
- Current state employees in named bargaining units — the bill mandates payroll deductions that raise employees’ pensionable compensation contributions by several percentage points over the phase‑in period.
- The state as employer — required to provide matching contributions and to absorb the employer side of any increases needed by actuarial adjustments, creating durable budgetary obligations.
- Payroll, HR, and actuarial administrators — implementing unit‑level schedules, suspension windows, frequent valuation‑based adjustments, and nonstandard effective dates increases operational complexity and administrative cost.
- Budget flexibility for future Legislatures — suspensions in some fiscal years delay prefunding and shift costs into later periods, potentially concentrating fiscal pressure on subsequent budget cycles.
Key Issues
The Core Tension
The central dilemma is balancing actuarial soundness against political and budgetary relief: AB 138 seeks to establish fiscally responsible OPEB prefunding (50% cost‑sharing, actuarial adjustments) while simultaneously allowing negotiated exceptions and temporary suspensions that ease near‑term budget pain — a trade‑off that improves short‑term liquidity at the cost of delayed prefunding and greater long‑term uncertainty.
AB 138 blends actuarial discipline with political compromise, and that produces implementation puzzles. The statute’s reliance on a 0.5 percentage‑point trigger and a 0.5 percentage‑point annual cap smooths volatility but can under‑react to sustained actuarial deterioration; conversely, the cap protects employees and the state from abrupt rate shocks.
Because different units begin adjustment cycles on different dates (some with October or specific post‑ratification effective dates), actuarial valuation timetables will not line up neatly with payroll cycles, creating timing mismatches that complicate year‑end accounting and contribution reconciliation.
The temporary suspension windows are a second tension point. They provide explicit short‑term budget relief — suspending employee withholding, employer matching, or both for specified years — but they also push funding farther into the future.
Those suspensions reduce prefunding momentum and make reaching the 50% target contingent on later, possibly larger, adjustments. Finally, the MOU supremacy clause creates legal and operational uncertainty: negotiated agreements can override statutory schedules, yet any MOU‑driven spending remains subject to Budget Act approval.
That duality means the statute sets a baseline framework but leaves actual funding paths dependent on bargaining outcomes and the Legislature’s annual budget choices, which complicates forecasting OPEB trajectories.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.