CHICAGO – The credit rating firm Ritch Ratings today dropped the Chicago Board of Education’s credit rating down three notches to BBB-minus, “the lowest investment grade rung,” The Bond Buyer reports.

Fitch attached the BBB- rating to billions of bonds scheduled for negotiated sale next week, the sale of which “will be used to refund outstanding bonds and fund the board’s capital plan,” according to BusinessWire.

“The downgrade reflects the limited progress the Chicago Public Schools (CPS) has made in addressing a structural budget gap approximating 20% of spending for the upcoming fiscal year. Following substantial drawdowns in the prior and current fiscal years, reserves will likely to be fully depleted by the end of fiscal 2016,” the news site reports.

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The downgrade could result in $228 million in penalties.

Fitch analysts obviously don’t have a lot of faith in the school board’s ability to turn finances around, and expect the school budget to “require a significant infusion of short-term borrowing in 2016,” according to BusinessWire.

One of the biggest problems seem to be pension problems.

“Large pension liabilities were exacerbated by a three-year payment deferral that caused a dramatic jump in annual contributions beginning in fiscal 2014. Absent pension reform, the liability is likely to remain quite high,” BusinessWire reports.

And anticipated union strife during upcoming contract negotiations between the Chicago Teachers Union and CPS officials isn’t helping matters.

“Fitch believes the contentious settlement of the last contract negotiation with the Chicago Teacher’s Union (CTU) in 2012 may pose challenges for upcoming contract negotiations,” according to the news service.

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“Fitch believes the 2012 CTU strike made apparent the poor working relationship between the board and the CTU. Absent improvement, upcoming labor negotiations are likely to be challenging. The contract extends through June 30, 2015 unless extended at CPS’s option, with CTU approval. CTU represents about 74% of board employees.”

The downgraded rating will increase the cost for the school district to borrow money, and drops the CPS’ status to one level above junk bonds, Reuters reports.

The Fitch rating downgrade comes two days after Standard & Poor’s Rating Services dropped the board’s credit rating two notches to A-minus.

“We lowered the rating and changed the outlook to negative due to our view of the board’s fiscal imbalance that have so far resulted in an operating shortfall for fiscal 2014 and a projected shortfall for fiscal 2015,” S&P credit analyst John Kenward said in a statement cited by Reuters.

Kenward also warned that if something doesn’t change, such as an increase in state aid or tax revenue, the rating would continue to fall, according to the news site.

Other credit rating agencies have also expressed concerns about the district’s budget.

Reuters reports:

Moody’s Investors Service on March 6 dropped its rating for the school district to Baa3, just one notch above the junk level, due to pension pressures.

The two-notch downgrade, affecting $6.3 billion of the school district’s general obligation bonds, came a week after Moody’s downgraded the rating on $8.3 billion of Chicago’s general obligation bonds to Baa2.

The rating downgrades came ahead of the school system’s upcoming sale of about $372 million of new and refunding GO bonds. In its bond offering document released late on Tuesday, the Chicago Public Schools cited a projected $1.11 billion deficit in its budget for the fiscal year that begins June 30 with estimated revenue of $4.8 billion and expenditures of $5.9 billion.