A state labor agency has ordered the City of San Diego to bring back defined pensions for employees – a move that raises the prospect of years of further legal wrangling involving several thousand municipal employees and untold millions of dollars.

In 2012, San Diego voters approved Proposition B, which replaced "defined benefits" pensions with 401(k)-style retirement plans.

The Prop. B campaign gathered a record 116,000 signatures, at a cost of more than $1 million, and was passed by a two-thirds majority.

Labor unions challenged the measure on grounds that management had violated a state law known as the Meyers-Milias-Brown Act (MMBA) , requiring the city to engage in good-faith “meet-and-confer “ negotiations.

Critics said former San Diego Mayor Jerry Sanders illegally collaborated with citizen initiative groups to end the traditional pensions for all new hires except police officers.

On Wednesday, the California Public Employment Relations Board (PERB) agreed and ordered the City of San Diego to reinstate traditional pensions, and retroactively reimburse the employees “for the value of any and all lost compensation, including but not limited to pension benefits . “

The city will also owe employees 7 percent interest for any losses since Prop. B took effect, and be required to pay their attorneys’ fees – now estimated as running into seven figures.

The 65-page PERB order included this language: “… the city cannot exploit the tension between the MMBA and the initiative process to evade its meet-and-confer obligations.”

San Diego City Attorney Jan Goldsmith said the ruling -- which upheld an earlier finding by a PERB administrative law judge -- was expected, and will be contested if the City Council follows his legal advice.

“The law does not give labor unions the power to negotiate the terms of a citizens' initiative," Goldsmith said.

A spokesman for Mayor Kevin Faulconer, who backed the measure as a city councilmember at the time, issued this statement on the ruling: “Mayor Faulconer believes the will of the voters should be upheld and is confident that an appellate court will affirm the right of the San Diego people to enact pension reform.”

City labor leaders predicted otherwise – pointing out that the 4th District Court of Appeal had rebuffed an attempt by the city to sidestep PERB administrative proceedings on the unions’ claims of “unfair labor practices”.

“The city will continue to follow (Goldsmith’s) advice at its own risk,” said Michael Zucchet, president of the city’s largest worker bargaining group, the 4,000-member Municipal Employees Association.

“The mayor just simply can’t take off his mayor hat and put on his private citizen hat,” Zucchet told NBC 7.

Said Frank De Clercq, former president of the International Fire Fighters Local 145: “They can appeal whatever they want, but in fact the citizens are going to be on the hook for enormous legal bills on both sides.”

DeClerq said Sanders had reneged on a promise not to subject fire fighters to the terms of Prop. B, and to exempt them along with members of the San Diego Police Officers Assn., who continue to receive traditional pension benefits.

“We tried and tried to get them to meet and confer,” he recalled, “but they refused. They just blatantly shut us down and said ‘No, we’re not doing it’.”

Ed Harris, spokesman for the San Diego Lifeguard Assn., says Prop B has hurt the city’s efforts to recruit and retain employees in competition with other public agencies that offer defined pension benefits.

“Sanders and Faulconer touted this as such a victory for the taxpayers,” Harris said in an interview, “but the reality is, it will end up costing the taxpayers … the savings were all out of the five-year pay freeze.”