I am on my H1 visa with an agency in State government, but the IT section i work for is getting absorbed into a bigger agency as part of consolidation, so my question is "what should i do next?"
1. Should the new employer do H1 transfer (not the right term though) for me
2. Will it be Ok, if i stay on my current H1, without any changes..
If any changes need to be done, what would those be, please help me out kindly.
The best answer to this question is: "it depends." Generally speaking, new employer=new H-1B (it's conceptially like a change of status from H-1B to H-1B). However there are exceptions. The exceptions are highly situation-specific. Since you are the person who will be hurt most by a mistake, I highly recommendation getting a consultation from an experienced immigration attorney.
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