September 29, 2006

The Honorable Mayor Ernie McAlister

Members of the Town Council and Citizens

Town of Cary

316 N. Academy

Cary, North Carolina 27513

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

The Comprehensive Annual Financial Report of the Town of Cary, North Carolina is submitted for your review and use. This report was prepared by the Town’s Finance Department and it is the comprehensive publication of the Town’s financial position and results of operations as of and for the fiscal year ended June 30, 2006. The Town, like all other local governments in the State, is required by state law to publish a complete set of financial statements within four months of the close of each fiscal year. The financial statements must be presented in conformity with generally accepted accounting principles (GAAP) and audited in a accordance with generally accepted auditing standards by a firm of licensed certified public accountants. This report is published to fulfill that requirement for the fiscal year ended June 30, 2006 and to provide complete and further accountability to citizens and other interested parties by providing a comprehensive report in lieu of the minimum basic financial statement requirements.

As a comprehensive annual financial report this document provides financial detail and historical trends beyond the basic financial statements in the Financial Section. The Supplementary Information provides details on capital project activity and the utility system enterprise fund, and the Town’s internal service funds, trust fund and special revenue fund. The Statistical Section provides trend information on financial performance, revenue capacity, debt capacity, demographic and economic indicators as well as operating information. A Compliance Section includes documentation on federal and state grants and awards compliance, as well as revenue bond covenant compliance.

Town management is responsible for both the accuracy of the data and the completeness and fairness of the report. To ensure reliability of the information Town management has established a comprehensive framework of internal control. Internal controls protect the Town’s assets from loss, theft and misuse and provide reliable information for the preparation of this report. Because the cost of internal controls should not outweigh their benefits, the Town’s controls have been designed to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. As management, to the best of our knowledge and belief, this financial report is complete, accurate and reliable in all material respects.

As noted above, the Town is required by state law to have an annual independent financial audit. A compliance audit on federal and state financial assistance is also required under the Federal Single Audit Act of 1984 and the State Single Audit Implementation Act. Cherry, Bekaert & Holland, LLP, Certified Public Accountants, conducted the audits and concluded in an unqualified (“clean”) opinion that the financial statements present fairly in conformity with GAAP, in all material respects, the financial position and changes in financial position for the Town of Cary, North Carolina, as of June 30, 2006. The independent auditors’ report on the basic financial statements is located at the beginning of the financial section of this report.

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

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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 counties 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. According to the 2000 US census, 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, 2006 of 115,854. This is an increase of 4,815 people (+ 4.34%) since the July 01, 2005 estimate. Cary's population has increased by 21,318 people (+22.55%) 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. The seven member Council is the policy-making and legislative body of Town 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 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, fixed route and 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 Cary Town 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, for example, 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 a number of high technology employers within its borders including SAS Institute, the world's largest privately held software company, as well as from Raleigh and RTP, which employs over 40,000 in high-technology fields. 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 along with the state government. 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 1.0% to a high of 4.9% with a rate at June 30, 2006 of 2.9%.

The strong employment and higher education opportunities, a warm climate, low crime rates and easy access to outstanding recreational and cultural amenities have helped make the region in which the Town is located one of the fastest growing in the country. During the fiscal year, the Town issued 1,876 permits for new single family residential construction, the highest permit level since 1994, including the construction of homes in the first residential community designed and built by Martha Stewart Living and KB Home.

Notable economic development in Cary in 2006 included the expansion of Ultimus, a provider of business process management (BPM) and workflow software and solutions. Ultimus recently broke ground at its new site in Cary, N.C. Rashid Khan, CEO and co-founder, Ultimus, Inc. stated “…As a successful worldwide company we are proud to be headquartered in the technology hotbed of North Carolina.” CeNeRx, a start up biopharmaceutical company located in Cary, obtained financing that positions it to advance critical research and development. In other healthcare industry news, Healthways Inc., which provides disease management services to health insurance companies and hospitals on a contractual basis opened a 50,000-square-foot call center in Cary's RDU Center office park to house 150 nurses.

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 2007 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, Council has adopted a policy guideline of 50% fund balance compared to the current operating budget for the General Fund and 75% for the Utility Operations sub fund. The Town has exceeded the guideline for the General Fund consistently and consistently remains close to if not over the 75% target in utility operations. These policy guidelines in addition to fiscally responsible budgeting have been key factors in maintaining the Town’s 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 final components of the $33 million Town Hall campus expansion project was completed in December 2005. The project included a new police department and technology facility, a new Council chamber, a new parking deck, and renovation of two existing buildings.

• Progress was made on authorized projects of $140 million with $26.8 million in spending on transportation projects including Davis Drive, High House and Tryon Road widening, and the $12.0 million fiber optic traffic signal system project neared completion.

• The construction was completed on a $13 million thermal biosolids dryer and the dryer was placed into service. Another $13 million project was completed for the expansion of the North Cary Water Reclamation facility. Active utility projects include two new wastewater pump stations in the western part of town and a pump station expansion totaling $22.6 million. The Town also made significant progress working with the Towns of Apex, Holly Springs, and Morrisville toward purchasing land, designing, and obtaining permits for new regional wastewater treatment facilities that are expected to cost 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.

• Fiscal year 2006 was busy with construction on 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.

Other significant initiatives and events in fiscal year 2006 include the following:

• Cary announced that SAS Soccer Park would be home to an United Soccer League expansion team, the Carolina RailHawks.

• Cary and Morrisville utilities were merged April 1, 2006. Cary owns and operates the merged utility system that now includes an additional 5,000 customers in Morrisville.

• The Town began its first fixed route service on C-Tran, Cary’s public transportation system.

• The transition to rollout cart service for solid waste was completed which was the result of a Council decision to save customers millions of dollars in the future.

• North Carolina State Games brought 10,000-14,000 athletes to Cary again in 2006, generating an estimated $3 million in revenue for the Town.

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, 2005. This is the twenty-first 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 2006. 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