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The decision by the board will lead to a lawsuit to try to remove the measure from the ballot.

The initiative -- if passed -- would give most new employees 401(k) plans instead of enrolling them in the debt-ridden pension system. The measure would also figure only base compensation over the next five years into the eventual retirement pay of workers.

City unions contend that the initiative is sponsored by the city, since Mayor Jerry Sanders and Councilman Carl DeMaio are two of its leading advocates, requiring union bargaining.

The unions state in their unfair labor practice complaint that the city did not engage in the meet-and-confer process as required.

Initiatives from private citizens do not carry the meet-and-confer provision, so whenever Sanders and DeMaio appeared at news conferences or events to gather signatures to qualify the measure for the ballot, they stressed they were acting as private citizens.

"(The ruling) adds credence to what we've been saying all along during this initiative process, that it is a city-sponsored initiative and there is no way Sanders was acting as a private citizen," said Joan Raymond, president of the American Federation of State, County and Municipal Employees Local 127 in San Diego.

The blue-collar workers she represents engage in back-breaking work and deserve the guarantee provided by a pension, Raymond said.

Rep. Bob Filner, D-San Diego, said the measure was "wrong-headed, unfair and ineffective."

Filner, who is running for mayor, said he had planned to introduce his own pension reform plan to the City Council on Tuesday, but instead might wait an extra week to monitor the fallout from the PERB ruling.

Sanders, who held a news conference Monday at the National Press Club in Washington, D.C., to tout pension reform progress, said the initial decision by the PERB board was unfortunate.

"The bottom line is this measure has rightly qualified for the ballot," Sanders said. "The public deserves the opportunity to vote on this. We will vigorously fight to give voters the right to decide this matter."

DeMaio, another mayoral candidate, said it was no surprise that the state labor agency would side with city workers.

"I am completely confident that the courts will dismiss this desperate lawsuit and uphold the constitutionally protected right of citizens to place measures on the ballot through the initiative process," DeMaio said.

"It is outrageous that government unions and their Sacramento defenders are trying to claim they can veto the citizens' constitutional rights in this matter, but it provides yet another example of the contempt the government unions have for the taxpayers of San Diego and the lengths they will go to in protecting their unsustainable pension payouts," he added.

Municipal Employees Association General Manager Michael Zucchet told 10News, "It's the city of San Diego that violated the law and mayor Jerry Sanders and city attorney Jan Goldsmith who were told very specifically by us this was going to happen. Employees have always worked with the mayor to generate significant savings, pay cuts, reform of retiree health care; billions of dollars of reforms over the last couple of years by agreement, not by campaigning at the ballot box."

The city has 20 days to respond to the lawsuit. The PERB has scheduled an informal conference on the issue on Feb. 23 in Glendale.