Fresh from a key court victory, Albany’s Empire State Development Corporation (ESDC), via its subsidiary, the Brooklyn Arena Local Development Corporation (BALDC), yesterday approved the issuance of up to $800 million in bonds for the construction of the Atlantic Yards basketball venue, sponsored by developer Bruce Ratner.

What is state and city taxpayers’ obligation here?

As A/Y blogger Norman Oder reports, up to $650 million of the financing would be tax-exempt (meaning that the state and city, as well as the feds, are losing the value of the taxes). The rest would come in taxable bonds.

Technically, the bonds don’t enjoy state backing or ESDC backing. They will rely on revenues for their repayment. Ratner will make “payments in lieu of taxes” for the tax-exempt bonds, and he’ll use money from other arena-related revenues (not well-defined at the moment) to pay back the junior, taxable portion.

ESDC officials said yesterday that the arena will garner investment-grade ratings, but none of the three major ratings agencies has released a report yet.

Are potential investors really counting on the arena’s revenue to be enough? As the Wall Street Journal reported last month,

The past year has seen top sports teams including the New York Yankees, New York Giants and New York Jets struggle to sell premium seats and luxury suites in new stadiums. The Nets, meanwhile, are a struggling franchise that lost more than $30 million last season playing at the Izod Center in New Jersey.

Plus, Ratner must sell the bonds by December 31 to meet the IRS’s deadline for tax-exempt issuance backed by payments in lieu of taxes (which won’t be allowed in the future). It’s unclear how much due diligence potential investors can do in a month on a complex financing in an uncertain investment environment that doesn’t offer many comparable benchmarks.

So, perhaps potential investors are counting on something else instead.

The possibility is that bond investors will simply rely on Atlantic Yards being “too big to fail” — that is, they’ll figure that New York State and City have invested so much political capital in the project that they’ll step in to make up for any revenue shortfalls.

Yesterday, ESDC officials didn’t exactly disabuse anyone of this notion, according to Oder’s account.

When a WNYC reporter asked if ESDC would let the bonds default “if Ratner can’t make these payments,” ESDC lawyer Jonathan Beyer said coyly, “I don’t know if I’d characterize it as willing. It’s just that the documents do not require us to make any payments.”

When the reporter tried to pin the state agency down, saying that “you might actually decide … to bail out these bonds,” ESDC chief financial officer and BALDC president Frances Walton said “that’s speculation.”

Ahead of any bond sale, Gov. Paterson and Mayor Bloomberg should make it crystal-clear, publicly and to potential investors, that no New York State or City entity will step in to make up for any shortfall in Atlantic Yards’s revenues, even if it means a bond default.

Otherwise, the governor and the mayor are just playing a dangerous game with investors — a game that could end up costing New Yorkers even more money that should instead go to critical infrastructure projects such as subways and bridges.

We have enough “too big to fail” in this town.