(Reuters) - A lawsuit by retired Rhode Island public employees over the state's sweeping 2011 pension system overhaul will continue after a judge on Wednesday rejected a move by state officials to have the case thrown out.

Superior Court Associate Justice Sarah Taft-Carter found that the retirees' pension benefits, for which they had previously bargained, suggested enough of a contractual relationship with the state for their claims to continue.

Rhode Island's 2011 pension overhaul, considered among the most far-reaching in the United States, has been used by other state and local governments as a model to rein in the ballooning cost of retirement benefits for public-sector workers.

But pension changes also prompted public employees' unions to sue on the grounds their retirement benefits were contractual relationships that were allegedly violated by reforms.

"These retired workers lived up to their end of the deal by dutifully paying into a pension system that was promised to be there when they needed it," said plaintiffs' spokesman Ray Sullivan. "The changes made to the state pension system were undeniably an unconstitutional impairment of a contractual right."

In a joint statement, spokespeople for Governor Lincoln Chafee and General Treasurer Gina Raimondo said the decision was expected and is consistent with a previous ruling by the same judge in a related case.

"The State continues to believe that the pension changes enacted by our General Assembly are constitutional and that the State has strong legal arguments to support its positions," they said. "We are preparing for trial on all of the relevant issues, including whether the General Assembly's changes were reasonable and necessary."

The two sides had reached a settlement that would have resolved multiple Rhode Island lawsuits filed over several years by retirees' groups and labor unions representing police, firefighters, teachers and municipal employees.

But police union members rejected the deal, prompting the judge last week to order the parties back to mediation, where they had been trying to hash out an agreement with the state for a year. By Friday, however, mediation had failed, putting the state on track for a potentially costly trial, scheduled to begin in September.

(Reporting by Hilary Russ in New York. Editing by Andre Grenon)

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