With marina dredging project bills stacking up, the Oak Harbor City Council Monday moved forward with a plan to pay off a contractor by borrowing from itself.

It was also introduced to an option to fund the project over the long term with $2.56 million in Limited Tax General Obligation, or LTGO, bonds that would be backed by the general fund.

In January, the city’s original plan to fund the project with revenue bonds backed by marina revenue ran into a kink when the municipal bond market saw an unexpected downturn and the city was unable to lure buyers at acceptable interest rates.

Since then, the city has received at least $768,000 in invoices from the project contractor, Northwest Marine Construction. To pay off the debt, Doug Merriman, city finance director, proposed the city borrow up to $2.56 million from the equipment replacement fund at an interest rate of 1 percent.

The “draw-down” loan will allow the city to pay invoices as received. While it would have to be paid off no later than Dec. 31, Merriman said he expects it will be done as soon as March when the city secures its long-term bond funding.

Weighted-average interest rates for LTGO bonds are expected to come in under 5 percent. While they are backed by the general fund and reduce the city’s bonding capacity, Merriman believes neither issue poses serious problem.

If revenue bonds ever did default, the city council can and probably would go to the general fund before leaving bond holders with worthless investments, he said. The primary difference is that revenue bonds require a 10 percent reserve as a safeguard.

If the city council moved forward with LTGO bonds, the city’s non-voted debt capacity of $24.61 million would be reduced to $22.05 million.

Merriman said a proposal would be brought to the city council March 1.