SB 138 requires California to prefund retiree health benefits for state employees in specified bargaining units and the judicial branch, with the stated goal of achieving a 50-percent cost share of actuarially determined normal costs between employer and employees. The bill specifies detailed, unit-by-unit schedules of employee contributions (expressed as percentages of pensionable compensation) and requires the state to match those contributions.
It also builds in automatic adjustment rules tied to actuarial valuations, annual caps on rate changes, and several temporary suspensions of contributions for particular fiscal years.
This matters to HR, payroll, budget offices, and labor negotiators because SB 138 converts long-standing implicit OPEB obligations into explicit, recurring payroll deductions and employer matching contributions. The bill creates multiple timing and adjustment hooks—suspensions, phased increases, and actuarial triggers—that will affect near-term cash flow and long-term liability recognition for the state and change bargaining-unit compensation calculations (for example, by redirecting statutory salary increases in one unit into OPEB funding).
At a Glance
What It Does
Requires prefunding of retiree health for named State Bargaining Units and the judicial branch, with unit-specific employee contribution schedules matched by the state and a statutory goal of 50-percent cost sharing of actuarially determined normal costs. Establishes annual adjustment mechanics tied to actuarial valuations and caps changes at 0.5 percentage points per year; includes explicit suspension windows for contributions in 2020–21 and 2025–27 for many units.
Who It Affects
Employees eligible for state health benefits in the listed bargaining units and the judicial branch, state payroll and HR administrators, Department of Finance and Department of Human Resources, and unions that represent those units—particularly Units 1–21 named in the text. It also affects retirees indirectly via the funding strategy and the Annuitants’ Health Care Coverage Fund.
Why It Matters
Shifts California’s OPEB approach toward prefunding and formalizes matching contributions and actuarial governance, creating predictable funding rules but also new payroll deductions and employer budgetary commitments. The combination of phased schedules, suspensions, and annual adjustment caps creates a complex implementation path that will affect bargaining, accounting (GASB/OPEB disclosures), and long-term liability management.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
SB 138 converts many of the state’s implicit retiree health promises into an explicit prefunding regime by naming the bargaining units and the judicial branch that must begin contributing toward future retiree health costs. For each named unit the bill sets out a timeline of employee contribution percentages (expressed as a share of pensionable compensation) and requires the state to match employee contributions.
The statutory objective is parity: employer and employee together should each bear 50 percent of the actuarially determined normal cost.
The mechanics differ by unit: some units have straightforward phased increases through 2019–2020, while others (notably Unit 5) use a more complex path that redirects statutory salary increases and phases contributions so that total combined contributions reach specific levels (for Unit 5 the combined target is 6.8 percent of pensionable compensation by mid-decade). Many units see temporary suspensions of employee and/or employer contributions for the 2020–21 fiscal year, and several units also have suspension windows for the 2025–26 and 2026–27 fiscal years.
Other units include explicit future adjustment points (often tied to the first day of the pay period following ratification and July 1 of a fiscal year) to re-align contributions with actuarial valuations.To keep the employer/employee split at 50 percent, the bill directs automatic adjustments if the actuarially determined total normal cost moves by more than 0.5 percentage points from the then-current contribution level; those adjustments cannot exceed 0.5 percentage points per year. Some units additionally permit or require predetermined percentage reductions or increases at specific dates (for example, Unit 8’s scheduled 1.0-point reduction after ratification but no sooner than November 1, 2022).
Contributions collected under the statute are deposited in the Annuitants’ Health Care Coverage Fund and are explicitly nonrefundable to employees or beneficiaries.SB 138 also includes governance and boundary rules: a memorandum of understanding or addenda that conflicts with the section controls where negotiated, but any provisions requiring appropriation of funds do not become effective without legislative approval in the annual Budget Act. The Director of the Department of Human Resources is given authority to set contribution percentages for certain employees who are outside the listed bargaining units or who are excepted from the civil service, subject to the same 50-percent goal and timing guidance.
The Five Things You Need to Know
Contributions are unit-specific: the bill lists schedules for Units 1–21 (selected units) and the judicial branch with varying phased employee percentages and mandatory state matches.
Adjustment trigger and cap: if actuarially determined total normal costs change by more than 0.5 percentage points, employer and employee rates are adjusted to restore a 50% split, but any single-year change is capped at 0.5 percentage points.
Defined suspension windows: many units suspend employee and/or employer contributions for the 2020–21 fiscal year, and several units have a second suspension that blocks contributions during fiscal years 2025–26 and 2026–27.
Unit 5 exception: Unit 5 redirects a 3.4% statutory salary increase to count toward the employee share, then phases both employee and employer contributions so that combined contributions total 6.8% of pensionable compensation at specified future dates.
Fund and nonrefundability: all contributions go into the Annuitants’ Health Care Coverage Fund and are explicitly nonrefundable to employees, beneficiaries, or survivors.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Prefunding requirement and 50% cost‑sharing goal
Lists which bargaining units and the judicial branch are covered and sets the statutory goal that employer and employee together achieve a 50% share of actuarially determined normal costs by the unit-specific target dates. Practically, this provision creates the policy baseline: units named here must move from implicit, pay-as-you-go OPEB arrangements toward explicit prefunding according to the schedules in subdivision (b).
Unit-by-unit contribution schedules, matches, and adjustment rules
Prescribes the specific employee contribution percentages (as percentages of pensionable compensation) for each unit, requires a matching employer contribution, and embeds the actuarial adjustment rule: if total normal costs change by more than 0.5 percentage points, both sides’ rates are adjusted to restore a 50/50 split, subject to an annual 0.5 percentage‑point cap. This is the operational core: it establishes payroll deduction amounts, state budget liabilities, and a predictable if gradual pathway for rebalancing when actuarial experience shifts.
Temporary suspensions and timing quirks that alter funding flow
Across many unit schedules the bill inserts explicit suspension windows—most commonly suspending employee withholdings for 2020–21 and, for a subset of units, suspending both employee and employer contributions in 2025–26 and 2026–27. These clauses relieve near-term cash flow pressure but shift the timing of prefunding and complicate actuarial projections. Implementation requires payroll systems to recognize varying effective dates tied either to July 1, the first day of a post‑ratification pay period, or specified calendar dates.
Unit 5 redirects statutory salary increases and follows a bespoke phased path
Unit 5 is treated uniquely: the bill redirects a 3.4% statutory salary increase to count toward the employee contribution share, sets a multi-year schedule such that combined employee and employer contributions total 6.8% at specific milestones, and provides for suspension windows similar to other units. The text also requires incorporation of the redirected share into Unit 5’s salary survey under Section 19827, which creates an administrative coupling between salary-setting mechanics and OPEB funding.
Eligibility and fund deposit rules
Clarifies the section applies only to employees eligible for health benefits (including permanent intermittent employees) and directs that contributions be deposited into the Annuitants’ Health Care Coverage Fund. The statute makes contributions nonrefundable under any circumstance, which removes portability or refund options and ensures the funds are available only for retiree health purposes.
MOU supremacy and Budget Act limitation
States that a conflicting memorandum of understanding or addenda controls without further legislation, but any MOU provision that would require expenditure of funds does not take effect unless the Legislature approves the expenditure in the annual Budget Act. This creates a negotiated-first rule tempered by the Legislature’s power over appropriations.
Director authority for non-unit employees and officers
Authorizes the Director of the Department of Human Resources to set employee contribution percentages for certain employees and officers not covered by the named bargaining units (those excepted from the civil service or not part of a bargaining unit), with the same 50% cost-sharing objective and timing guidance. This gives the executive branch administrative flexibility to extend the prefunding framework outside traditional collective bargaining structures.
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 eligible for state health benefits — Prefunding increases the probability that dedicated assets will be available to pay retiree health costs and reduces reliance on ad hoc general‑fund allocations.
- State financial managers and actuaries — The law provides a predictable, actuarially driven path for contribution rates and enables more consistent OPEB accounting and long‑term planning.
- Annuitants’ Health Care Coverage Fund — Receives dedicated deposits and gains legal protection against refund claims, improving fund integrity and governance.
Who Bears the Cost
- Employees in the affected bargaining units — Face mandatory payroll contributions (percentages of pensionable compensation) per the unit schedules; suspensions in some years delay costs but do not eliminate them.
- The State (employer) — Must provide matching contributions and absorb the budgetary impact of matching amounts and later adjustments, subject to Budget Act constraints for any negotiated increases that require appropriations.
- Payroll, HR, and benefits administrators — Must implement staggered effective dates, suspension windows, and actuarially triggered rate changes across multiple units, increasing administrative complexity and potential for implementation errors.
Key Issues
The Core Tension
SB 138 confronts the classic trade-off between long‑term fiscal responsibility and short‑term affordability: it forces prefunding to reduce future OPEB risk and improve actuarial health, but does so through mandatory payroll deductions and employer matches that strain current budgets; the bill’s suspensions and capped adjustments try to temper that strain, yet those same mechanisms push costs forward or slow the plan’s ability to catch up when liabilities rise.
SB 138 stitches together a detailed prefunding scheme out of many unit‑specific schedules, but that granularity creates operational and policy frictions. The use of temporary suspensions (notably 2020–21 and 2025–27 windows) relieves near‑term pressure but defers cash into later years when actuarial liabilities may be higher; without explicit amortization changes the state risks building larger future payment obligations.
The annual adjustment mechanism restores a 50/50 split when actuarial normal costs move more than 0.5 percentage points, yet the 0.5‑point single‑year cap can slow responses to rapidly changing actuarial experience and produce multiyear lag between liability drivers and contribution rates.
Unit 5’s treatment—redirecting a statutory salary increase into the employee share and mandating its inclusion in salary surveys—creates an unusual linkage between compensation policy and OPEB funding that may distort bargaining dynamics and salary comparability data. The statute’s provision that negotiated MOUs control but still require legislative appropriation for any spending—creates a legal and budgetary tension: unions can negotiate terms, but the state’s ability to honor them requires budgetary sign‑off, leaving possible legal ambiguity about enforceability versus fiscal feasibility.
Finally, granting the Director of Human Resources rate‑setting authority for non‑unit employees centralizes administrative control but raises equity and transparency questions about how those rates are determined compared with negotiated outcomes.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.