October 11, 2005

The Honorable Mayor Ernie McAlister

Members of the Town Council and Citizens

Town of Cary

120 Wilkinson Avenue

Cary, North Carolina 27513

Dear Mayor, Members of the Town Council, and Citizens:

State law requires that every local government publish within four months of the close of each fiscal year a complete set of audited financial statements. This report is published to fulfill that requirement for the fiscal year ended June 30, 2005.

Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements.

Cherry, Bekaert & Holland, LLP, Certified Public Accountants, have issued an unqualified (“clean”) opinion on the Town of Cary’s financial statements for the fiscal year ended June 30, 2005. The independent auditors’ report is located at the front of the financial section of this report.

Management’s discussion and analysis (MD&A) immediately follows the independent auditors’ report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complements this letter of transmittal and should be read in conjunction with it.

PROFILE OF THE TOWN

Cary, incorporated in 1871, is a thriving community in the heart of the Triangle area of North Carolina. The Triangle area has repeatedly ranked among the top regions in the country to live or work, to find a home or start a business, to raise a family or retire. Cary encompasses approximately 51 square miles in Wake and Chatham County in the Piedmont region of the state. Cary adjoins the City of Raleigh, which is the state capital and the county seat, at the Town’s eastern boundary. At the Town’s northwestern boundary, the Town approaches renowned Research Triangle Park (“RTP”).

Cary is a diverse community primarily composed of young, affluent and well-educated people. The median age of Cary’s population is 33.7 years, more than two thirds of Cary’s adult population has a college degree, and fourteen percent were born in another country. Cary’s diversity coupled with it being in one of the most desirable areas in the country, has resulted in continued growth in commercial and residential construction.

The Town is the seventh largest municipality in the State based on the Town’s population estimate at June 30, 2005 of 111,039. This is an increase of 3,066 people (+ 2.67%) since the July 01, 2004 estimate. Cary's population has increased by 16,503 people (+17.46%) since the last U.S. Census on April 1, 2000. Cary is empowered by state statute to extend its corporate limits by annexation, which it has done from time to time.

The Town has a council-manager form of government. Four of the seven members of the Town Council are elected from districts, and three members, including the Mayor, are elected at large. Each of the council members and the mayor serve four year staggered terms. The Town Council has policy making and legislative authority. The Council is responsible for the budget approval and appointing the Town Manager, Town Attorney and Town Clerk. The Town Manager is responsible for implementing Council policies and Town Ordinances, managing daily operations, and appointing department directors.

The Town provides its citizens with a full range of services, including police and fire protection, solid waste and recycling services, the construction and maintenance of streets, curbs, gutters, sidewalks and other infrastructure, recreation and cultural activities, demand-response transit service, and water and sewer service. This report includes all of the Town’s activities in delivering and administering these services.

The Council is required to adopt a budget by July 1 of each year. The Town is empowered to levy a property tax on both real and personal property located within its boundaries. The Town’s budget ordinance creates a legal limit on spending authorizations, and serves as the foundation for Cary’s financial planning and control. The budget is prepared by fund and function (e.g. public safety). The Town Manager is authorized by the budget ordinance to make certain limited transfers within funds to facilitate budget execution consistent with Council intent.

LOCAL ECONOMY

Employment opportunities are derived from within the Town as well as from Raleigh and RTP, which employs over 40,000 in high-technology fields. The Town enjoys a number of high technology employers within its borders including SAS Institute, the world's largest privately held software company. Other major employers within the town limits include MCI, American Airlines Reservations Center, WakeMed Cary Hospital, and Kellogg’s Snacks. In addition, the Raleigh-Durham-Cary area also contains several colleges and universities and major health care facilities. This diverse group of employers in the region has historically been relatively stable and less sensitive to economic downturns. As a result, the unemployment rate has historically been extremely low. During the past ten years, the unemployment rate has varied from a low of 1.5% to a high of 4.9% with a rate at June 30, 2005 of 3.7%.

During the fiscal year, the Town approved nearly 2,000 single family lots and about 600 town homes and multifamily units mostly located in the western part of town. Other significant site plan approvals during the year included a luxury hotel on the SAS Institute campus, a 10 story nearly 300,000 square feet office building, numerous retail and office buildings with over 370,000 total square footage, and a new regional library to be built by the county on land purchased by Cary.

Notable economic development in Cary in 2005 included the relocation of Alliance One International, which added 50 jobs and another publicly traded company to the area. Also, RH Donnelley, headquartered in Cary, acquired Dex Media, making it the third largest print and internet directory in the United States DataFlux Corporation LLC, a SAS company, expanded its headquarters in Cary. Arysta LifeScience selected Cary for its North American headquarters, leasing 25,000 sq. ft. in Cary and bringing approximately 50 jobs. North Carolina State Games brought 10,000-14,000 athletes to Cary, generating an estimated $3 million in revenue for Cary.

These new and expanding businesses, and the jobs which they create, help to maintain a healthy balance in the tax base that has enabled the Town to keep property tax rates and water and sewer rates at moderate levels while providing the infrastructure and high level of services demanded by citizens.

Overall, Cary's economy is expected to remain stable. Council has adopted a fiscal year 2006 budget based on a moderate rate of growth. In planning for the future, the Town continues to maintain a high priority on both the delivery of quality services and financial stability.

LONG-TERM FINANCIAL PLANNING and MAJOR INITIATIVES

Cary is consistently recognized for its quality of life. Careful planning for growth has been based on values for an attractive community, a strong commitment to environmental protection, adequate public facilities in advance of growth and a variety of local recreational opportunities while maintaining a strong financial position. The Town Council has committed to key goals and initiatives. These goals and initiatives along with Town accomplishments are discussed in the Town’s annual budget document and on the Town’s website at www.townofcary.org

As demonstration of the Town’s commitment to financial planning and fiscal health, unreserved, undesignated fund balance in the general fund was $47.3 million or 57.6% of total general fund expenditures and transfers out at June 30, 2005, which is within the 50 percent policy guideline set by Council for budgetary and planning purposes. In addition, the Town maintained its AAA bond ratings on both the Town’s general obligation bonds and revenue bonds.

Each year the town adopts a capital improvement budget and prepares a 10-year capital improvement plan. During the year, the Town funded and managed many significant projects including the following:

The $33 million Town Hall campus expansion project continued that includes a new police and technology facility, a new Council chamber, a new parking deck, and renovation of two existing buildings. It is expected to be completed in early calendar year 2006.

Progress was made on $23 million in transportation projects including Davis Drive and Tryon Road widening, and changes to the US Highway 1 and 64 interchanges, as well as nearly $4 million on the fiber optic traffic signal system project.

Active utility projects include the continued construction of a $13 million thermal biosolids dryer, two new wastewater pump stations in the western part of town totaling $10 million, and a $13 million expansion of North Cary Water Reclamation Facility. The Town also began working with the Towns of Apex, Holly Springs, and Morrisville toward purchasing land, designing, and obtaining permits for new regional wastewater treatment facilities with total expected costs of approximately $200 million. These facilities, which will be jointly owned by the partnering towns with Cary serving as the operator, are expected to meet Cary’s wastewater treatment needs into the 2020’s. In May 2005, Cary voters approved a $110 million general obligation bond referendum to fund Cary’s portion of this project. The successful bond referendum also included $10 million in open space bonds. In addition, Cary and Morrisville are working on an agreement to merge their two water and sewer utility systems. If the merger agreement is approved by both towns, Cary will own and operate the merged utility system.

In June 2005, Cary awarded a bid for the construction of the USA Baseball National Training Center, which is being built on 127 acres at Cary’s Thomas Brooks Park. The complex will feature three training fields, one signature field, retail space, a ticket booth, concessions, and restrooms, and should be completed by the summer of 2007.  USA Baseball selects and trains the Olympic Baseball Team and other USA amateur teams.

AWARDS AND ACKNOWLEDGEMENTS

The Government Finance Officers Association GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Town of Cary for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, 2004. This is the twentieth consecutive year that Cary has received this prestigious award. In order to be awarded a Certificate of Achievement, the government had to publish an easily readable and efficiently organized CAFR that satisfied both generally accepted accounting principles and applicable legal requirements. The Certificate is valid for a period of one year only. We believe our current CAFR continues to meet the Certificate of Achievement Program’s requirements, and we are submitting it to GFOA to determine its eligibility for another certificate.

In addition, the Town also received the GFOA's Distinguished Budget Presentation Award for its annual budget document for the fiscal years ended June 30, 1987 through 2005. In order to qualify for the Distinguished Budget Presentation Award, the government's budget document had to be judged to be proficient as a policy document, a financial plan, an operations guide, and a communications device.

This report is the work of the efficient and dedicated staff of the Finance Department. We wish to express our appreciation to all members of the department who assisted and contributed to the preparation of this report and to the entire Town staff for their cooperation and assistance. Credit is also due to the mayor and the members of the Town Council for their unfailing support of the highest standards of professionalism in the management of Cary’s finances.

_______________________ ________________________

William B. Coleman, Jr. Karen A. Mills, CPA

Town Manager Director of Finance