The methods can be either one, because they are called through the sns-governance-canister so it will be an inter-canister-call which can be either update or query. However as of now the sns-governance-canister does not save the response into the proposal.
As of now the generic function can return anything as long as it replies with something, it is considered a success, even if it replies with Err(String). This comment in the sns-governance-canister-code says more. It looks like there was an idea to do as you suggest but it is not implemented.
There is a way to communicate that the function fails without trapping, and that is to use the ic0.msg_reject system api, read about it in the interface spec here. This can be used to persist state while still returning a canister-error and thus reporting to the governance canister that the function failed. In the Rust cdk, you can do this using the ManualReply ManualReply in ic_cdk::api::call - Rust. In the query or update macro, you’d need to set manual_reply = true like this: #[update(manual_reply = true)] then set the return type of the method to ManualReply<YourActualReturnTypeHere>, then in the method you can return a success with return ManualReply::one(YourActualReturnTypeHere); or return a canister-reject (while still persisting state) with return ManualReply::reject("your reject message here");.