SFUSD teachers strike continues, district returns to negotiating table

San Francisco Unified School District is facing an active teachers' strike that began Feb. 9, shuttering all 120 schools and affecting roughly 50,000 students as union and district negotiators return to the table. The United Educators of San Francisco seek a package including fully funded dependent healthcare via the district's Kaiser plan, a 9% salary increase over two years, more special-education staffing and protections for sanctuary policies and a homeless “Stay Over” program; partial agreements have been reached on sanctuary language, the Stay Over program and AI regulations. District Superintendent Maria Su warned negotiations must respect a $100 million district deficit, signaling increased labor costs could force budgetary trade-offs absent new revenue or concessions.

Analysis

Market structure: The strike is a localized shock to San Francisco municipal finances that raises near-term payroll and benefit cost risks for SFUSD and, by extension, the City’s budget. Expect San Francisco and California school-specific muni spreads to widen modestly (10–50 bps) if negotiations force multi-year increases; national muni indices will see only muted flow impact unless other large districts follow suit.

Risk assessment: Tail risks include a prolonged strike (weeks) that forces a settlement exceeding $40–60m/year, pushing SFUSD deeper into a ~$100m deficit and prompting asset sales, service cuts, or calls on city/county support. Near-term (days–weeks) operational disruption is the main risk; medium-term (3–12 months) credit risk to SF muni issuers rises if settlements become precedent for statewide teacher demands.

Trade implications: The cleanest cross-asset play is duration and credit spread positioning in munis vs. Treasuries: buy Treasuries to hedge muni spread widening and selectively short CA/SF muni exposure. Options can express convexity—buy puts on broad muni ETFs if spreads widen >20 bps. Sector rotation: trim municipal-heavy regional exposure and marginally overweight high-quality sovereign duration.

Contrarian angle: The market may overreact to headlines—San Francisco benefits from state backstops and historically short-lived strikes (limited long-term credit impairment). If SF-specific muni spreads overshoot by >50–75 bps vs. California curve, there is a tactical mean-reversion buy opportunity for high-quality SF paper within 3–9 months.

Key Decisions for Investors

• Establish a 1.5% portfolio long in TLT (iShares 20+ Year Treasury) within 1 week to hedge potential muni spread widening; target 5–8% upside in stressed scenarios where MUB underperforms by 2–4% over 1–3 months.
• Take a 1–2% short position in MUB (iShares National Muni Bond ETF) or buy a 3–6 week put spread (e.g., buy 2.5% OTM, sell 1% OTM) if SFUSD strike continues past 2 weeks or if California/school district muni spreads widen >20 bps.
• If settlement requires recurring costs >$40m/year (monitor SFUSD press releases within next 14 days), initiate a tactical underweight (2–3%) in California municipal exposures and regional municipal bank equities with >10% loan exposure to municipal credits.
• If San Francisco-specific muni bonds widen >50 bps vs. the California curve, deploy 1–2% of portfolio to selectively buy high-quality SFGO or pre-funded SF school bonds (target IRR boost 100–150 bps vs. prior levels), exit within 3–9 months upon spread normalization.