If you are in a high tax bracket, then Bob Brinker recommends general obligation (GO) bonds of states rather than municipal bonds of cities and sewer districts. Brinker said he has a hard time believing that US government will let any state go bankrupt, especially a very large state like California.
In the past, Bob Brinker has recommended California's General Obligation bonds and has said in past shows he still held them.
California, the state I live in, currently has the worst credit rating of all the states due to our huge spending habit, billions of deficit and billions of debt despite a 9.3% income tax and 9.25% sales tax in my county. (I also pay nearly $10,000 a year in property tax for a 4b/2b home on 1/4 acre.)
I think there is a bit of spin in Brinker's answer. In the past, he said he would not own general obligation bonds from the state of Louisiana because it had the lowest credit rating of all 50 states. Now that California has a lower credit rating, Brinker probably finds it "easier" to change his advice than admit he might have been wrong about California GO bonds.
Brinker Could be Wrong
I think Brinker could be wrong about the government not letting California go bankrupt. California mostly votes the democratic ticket.
When George Bush was president and we got into trouble with Enron manipulating our rates, Bush left us hanging in the wind. Currently the Democrats control the house, senate and White House, but this could change.
I believe if the US government swings back to the right, perhaps if Obama's plans fail and ignite huge inflation with high unemployment. If we swing to the far right, then the GOP will take over government again. A GOP government would look upon a bankrupt California as proof out-of-control spending and massive taxes are the path to ruin. So, maybe CA GOs are safe as long as they mature before the next presidential election and be wary should the democrats lose the house and senate again.
This article from Smart Money seems to agree with me.
- keep the terms short
- diversify and
- keep an eye on the credit ratings of the issuing states (similar to Brinker's old advice to avoid Louisiana due to its poor credit rating.)