(Adds statement from CPS)
CHICAGO, Sept 26 (Reuters) - Moody's Investors Service dropped the credit rating for the Chicago Board of Education deeper into the junk level on Monday, citing the school district's liquidity and budget woes.
The downgrade to B3 with a negative outlook from B2 is due to the district's "increasingly precarious liquidity position and acute need for cash flow borrowing to support ongoing operations," Moody's said in a statement.
The nation's third-largest public school system has $6.8 billion of general obligation bonds outstanding. The Chicago Public Schools (CPS) is struggling with escalating pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency.
Moody's said the district has a "deepening structural deficit," as well as spending plans dependent on "unrealistic expectations" of financial assistance from the state of Illinois. The $5.46 billion fiscal 2017 budget includes a one-time $215 million infusion of state money contingent on the Illinois legislature's passage of state-wide pension reform by January.
The spending plan also banks on teachers agreeing to relinquish 7 percent of their earnings to devote to pensions, a proposal that was soundly rejected by a Chicago Teachers Union bargaining team in February.
Moody's noted the power of the union to impede cost cutting. On Monday, the teachers' union announced overwhelming support by its members for a strike.
The credit rating agency said the rating could fall even further down the junk scale should the district fail to make debt service or pension payments on schedule.
Ron DeNard, the district's senior vice president of finance, called Moody's an "outlier," as the school system's credit ratings with Standard & Poor's and Fitch Ratings are two notches higher, though still in the junk category.
"CPS's budget has improved over last year, with more than $600 million in new revenue commitments and more than $200 million in structural reductions since their last rating," he said in a statement.
(Reporting by Karen Pierog; Editing by Matthew Lewis and Leslie Adler)