Have the one hole sleeved and then bored to use your new .060 piston.
Your machinist should be able to check that block before doing any more work to make sure it's okay in the other cylinders.
Unless the previous owner had been putting sea water in it I doubt that simply sitting by the sea had much to do with the inside of the water jackets rusting. My bet is it was a thin spot in that cylinder to start with and when it was bored it opened the hole up. Or the cylinder was pitted bad from the piston side (as I recently had one) and the hole opened up.
Have the sleeve installed, bore it to match your pistons and put it together.
