Just prior to the full onset of the financial crisis, my wife and I left our jobs and put our belongings into storage and with our two toddlers embarked on a 12-month trip around the United States in a converted tour bus. We wanted to see and experience different areas of the country, and see first hand what makes our economy tick.

Our bus was too big to take into Yosemite National Park in California, so we set up camp in Chowchilla, a small city in the California Central Valley. The RV Park in which we stayed was part of a very large, multi- stage residential development on what had previously been vast farmland. The park itself was unusually nice for a campground, and had an almost resort-like feel to it.

Displayed in the RV Park office was a large map showing the different phases of the overall development. One thing that stood out was that while only very few of the houses had been built, the municipal infrastructure had already been developed. Sitting directly across from the RV Park, in the middle of what seemed like barren wasteland, was the brand new Ronald Regan Elementary School.

I scratched my head and couldn’t help but notice (it’s easy when these building stand alone in the middle of a huge field) that the tax revenues from the houses, that hadn’t yet been built, were going to pay for the municipal infrastructure that had already been built. What if they don’t sell the houses? I’ve been keeping an eye on how Chowchilla has been weathering the financial crisis.

Fast forward to a recent headline in the Merced Sun-Star: Chowchilla Teeters on the Edge of Financial Abyss. Chowchilla is seriously considering disincorporating, effectively turning the keys over to the county. This is the municipal equivalent of “jingle mail” when homeowners mail the keys back to the bank and walk away from their homes and mortgage obligations.

The Merced Sun-Star article describes how Chowchilla is on the brink of default (although it may already be in technical default) and highlights how nearly $800,000 was erroneously transferred from the bond repayment fund for city infrastructure to the city’s general fund. Apparently Chowchilla, like many other municipal issuers, seems to like the idea of interest only loans.

Investors who dismiss the warnings about the health of the municipal bond market as fear mongering should take a close look at what’s going on in Chowchilla. Conveniently, the city’s web site has a nice before and after photo gallery showing off all of its new, blinged out, infrastructure.

We enjoyed our stay in Chowchilla, but don’t like the thought of U.S. taxpayers picking up the tab for their inevitable bailout.

Years ago, a savvy municipal bond investor told me that if you’re going to buy an insured municipal bond, buy the lowest rated bond you can find. His theory was that if the economy turns sour the lowest rated issuers will be the first to default and you’ll be the first in line to collect from the bond insurer. It looks to us like this theory is going to be tested in the near future.

The municipal bond market is a virtual minefield of Chowchillas, muni bond buyers beware.