The Commonwealth Court ruling Wednesday is a setback for the NCAA, which wants the lawsuit filed by state officials thrown out.
The NCAA's 2012 consent decree with Penn State steers the $60 million fine into an endowment for child sexual-assault programs.
The NCAA says a later Pennsylvania law that orders the money be used in the state violates the initial agreement.
However, the court ruling Wednesday says the NCAA settlement only describes how the money should be spent - not where.
Judge Anne Covey's ruling allows a lawsuit filed by state Sen. Jake Corman and Treasurer Rob McCord to go forward.