I received a copy of a research newsletter from Brown Brothers Harriman, a prominent private bank based in New York. The piece is titled, “Does G.O. Spell Go?” and makes the valid point that municipalities around the country are under credit stress, and that general obligation (“GO”) bonds are not always as secure as they’ve always been perceived to be.

BBH lumps Stockton and San Bernardino, CA with Detroit, MI as “…examples of long-term struggles to achieve fiscal sustainability.” True enough…each of these cities has chronic financial problems that will make repayment of pensions and some debt problematic for decades to come. The article correctly points out that California cities have almost no ability to raise taxes to help cover obligations. The concluding point of the paper is that the traditional strength of the GO pledge can no longer be taken for granted.

We agree that the GO pledge ain’t what it used to be…except in California! And herein lies the problem with sitting in your office in New York and trying to tell Californians what kinds of bonds are good or bad. The folks at Brown Brothers Harriman have failed to do a basic piece of homework. The credit quality of a given bond is specific and unique to the exact circumstance of where and why and how it was issued. In every state, the moniker “GO” means something a little different.

In California (unlike other places), municipal GO bonds are approved by voters together with a specific, specially-pledged line item on the property tax bill to make repayment. That line item cannot be directed to any other purpose, and is levied and collected by the county and sequestered for bond payment. Accordingly, GO bonds are not part of a municipal bankruptcy: Stockton’s GO bonds were carved out of the court case and are not subject to the proceedings. The city could ultimately fail, be liquidated and replaced with something else — and the GO bonds will continue to be paid like clockwork.

There is no such thing as a “national outlook” for muni bonds. It’s the ultimate in hubris for an old-line, blue-blood New York firm to wag its finger at Californians and tell us which of our bonds are good and bad. It takes work to figure this stuff out, and we’ve been doing that work here, with boots on the ground, for almost 30 years. And we will continue to buy school and city GO bonds by the fistful. If the folks at BBH have any they’d like to get rid of, they know where to find us.