Hopes that interest rates in the municipal bond market would improve have gone unrealized and Oak Harbor may have no other choice but to take out an inter-fund loan so it can pay off incoming receipts for the marina dredging project.

Last week, Oak Harbor Finance Director Doug Merriman and a representative from the city’s bond consulting firm informed the council that plans to pay off the $2.75 million dredging project with 20-year revenue bonds suffered an unexpected setback.

Attempts to find buyers at an acceptable interest rate were unsuccessful. They recommended waiting a week to see if the market would improve but things have not and the city is faced with paying some hefty bills from the project contractor.

In a special meeting Thursday at City Hall, Merriman told the city council that he expected to receive a $750,000 invoice this month.

“That will require us to do some interim financing,” he said.

State law allows cities to borrow from funds in its own budget. In this case, Merriman said the city could take out a loan for up to $2.55 million from the equipment rental fund at an interest rate of up to 1.5 percent to pay off the expected bills.

As for long-term funding, there is no guarantee that the market will improve anytime soon and that the city will be able to sell the revenue bonds – it’s not one bond but 550 at $5,000 a piece – at an acceptable interest rate, Merriman said.

One alternative is to look into what are referred to as Limited Tax General Obligation bonds. They have several advantages, such as lower interest rates, ease of sale, and they don’t carry a 10 percent reserve requirement. However, they formally pledge city revenues should the bonds default and reduce the city’s non-voted debt capacity.

Oak Harbor City Councilman Jim Campbell asked Merriman why he suggested borrowing $2.55 million when the incoming bill is only $750,000. He also asked whether it was normal for the city to wait so long before securing lending.

“Why didn’t you do this stuff earlier?” Campbell asked.

Merriman said the proposal would be to borrow up to $2.55 million. The extra would provide wiggle room for any other invoices.

As for timing issues, Merriman said he’s been working on financing for the project for that past two and a half months. Issues such as bond rating, and total project bid price, are factors out of his control.

No decisions were made at the special meeting. Merriman said he would come back with more information at the city council’s Feb. 14 meeting.