State public employee health plans (PEHPs) provide health benefits for millions of state and local workers, retirees, and their dependents nationwide. This paper explores major issues and challenges that PEHP leaders and state policymakers are addressing. These include the perennial challenge of funding benefits for a diverse and aging workforce; new accounting standards affecting public employers; and the changing relationship between states, retired public employees, and the Medicare program. Interviews with PEHP executives explored whether these are incremental challenges to which states can effectively adapt, or whether these challenges will catalyze broader and lasting change in the public employee and retiree health benefits arena.