(Bloomberg) -- The Illinois Supreme Court rejected the state’ssolution for its worst-in-the-U.S. $111 billion pension- fundingshortfall, throwing into doubt how its financial crisis will beresolved.

The dispute was being watched around the country as stateand local governments grapple with total pensiondeficits that exceeded more than $2 trillion, according to aMoody’s Investors Service report last year. Closing that gap inmany states conflicts with union contracts and even constitutionalpension guarantees for public employees.

A lawyer for New Jersey Gov. Chris Christie was sharplyquestioned by that state’s highest court this week when he arguedfor a law to rein in public-employee pension costs he called“unsustainable.”

Illinois’s pension reform bill was signed by now-former GovernorPat Quinn in late 2013. A state judge blocked the law before ittook effect last June after public worker unions sued. IllinoisAttorney General Lisa Madigan in March asked the state’s top courtto resurrect the law, which sought to cut cost-of-living increasesand boost the retirement age.

The judge that voided the law concluded it violated a provisionadded to Illinois’s constitution in 1970 that bars the diminishingof public worker retirement benefits. The seven- member high courtagreed Friday in a unanimous ruling.

Grave problems

“In ruling as we have today, we do not mean to minimize thegravity of the state’s problems or the magnitude of the difficultyfacing our elected representatives,” Justice Lloyd Karmeier wrote.“It is our obligation, just as it is theirs, to ensure that the lawis followed.”

During arguments before the court in March, Solicitor GeneralCarolyn Shapiro argued the state should be able to invoke its rightto make necessary laws to protect public welfare and safety in atime of fiscal crisis.

The justices rejected the argument.

“Crisis is not an excuse to abandon the rule of law,” accordingto the ruling. “It is a summons to defend it.”

Natalie Bauer, a spokeswoman for the attorney general, declinedto comment immediately on the ruling. Quinn was voted out of officein November and succeeded by Republican Bruce Rauner. Thegovernor’s spokeswoman, Catherine Kelly, declined to commentimmediately on the court’s ruling.

Retiree ‘victory’

Democratic Senate President John Cullerton, who previouslyvoiced concern about whether the legislation could withstand alegal challenge, called the ruling “a victory for retirees, publicemployees and everyone who respects the plain language of ourconstitution.”

That outcome, he said, “should be balanced against the gravefinancial realities we will continue to face without truereforms.”

We Are One Illinois, a coalition of public-worker unions thatpressed the legal challenge, applauded the decision.

“With the Supreme Court’s unanimous ruling, we urge lawmakers tojoin us in developing a fair and constitutional solution to pensionfunding,” state AFL-CIO President Michael T. Carrigan said Fridayin a coalition statement. “We remain ready to work with anyone ofgood faith to do so.”

The case is In Re Pension Reform Litigation, 111585, IllinoisSupreme Court (Springfield).

With assistance from Elizabeth Campbell and John McCormickin Chicago.

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