October 1, 2004

The Members of the Board of Supervisors and the Citizens of James City County :

We are pleased to submit to you the Comprehensive Annual Financial Report of James City County, Virginia (the County), for the fiscal year ended June 30, 2004, as required by the Code of Virginia. The Department of Financial and Management Services has prepared this report in accordance with accounting principles generally accepted in the United States of America (GAAP) and the standards of financial reporting prescribed by the Governmental Accounting Standards Board, the Financial Accounting Standards Board and the Auditor of Public Accounts of the Commonwealth of Virginia . Section 15.1-67 of the Code of Virginia (1950, as amended) requires the County to have an annual audit of the books of account, financial records, and the transactions of the County. KPMG LLP was selected and approved by the Board of Supervisors to perform the required audit. The unqualified report of KPMG LLP, the highest possible result of the audit process, accompanies the financial statements in this report.

Responsibility for both the accuracy of the presented data and the fairness of the presentation, including all disclosures, rests with the County. We believe the data, as presented, is accurate in all material respects; that it is presented in a manner designed to fairly set forth the financial position and the results of operations of the various funds of the County; and that all disclosures necessary to enable the reader to gain maximum understanding of the County's financial activity have been included. The Comprehensive Annual Financial Report is presented in four sections; introductory, financial, statistical, and compliance. The introductory section includes this letter of transmittal, the Certificate of Achievement for Excellence in Financial Reporting, the government's organizational diagram and a list of principal officials. The financial section includes the report of independent auditors on the basic financial statements, the management's discussion and analysis, the basic financial statements, required supplementary information, and other supplementary information. The statistical section includes selected financial and demographic information, generally presented on a multi-year basis.

The County government is required to undergo an annual single audit in conformity with the provisions of the Single Audit Act of 1996, as amended, and U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations. Information related to this single audit, including the schedule of expenditures of federal awards, the schedule of findings, and questioned costs, and the auditors' reports on internal control and compliance with applicable laws and regulations, are included in the single audit of this report.

GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The County's MD&A can be found immediately following the report of the independent auditors on pages 3-10 of this report.

Profile of the Government

The County is located in southeastern Virginia and partially surrounds the City of Williamsburg : Although much of the County's 144 square miles consists of developed suburban areas, it has retained a considerable amount of undeveloped agricultural and forest land. There are no incorporated towns within the County. The County is empowered to levy a property tax on both real and personal properties located within its boundaries.

The County is organized under the County Administrator form of government (as defined under Virginia Law). Under this form of government, the Board of Supervisors appoints a County Administrator to serve as the Chief Executive Officer of the County. The Administrator serves at the pleasure of the Board of Supervisors, implements its policies, appoints department heads, and directs business and administrative procedures.

The Board of Supervisors is a five-member body, elected by the voters of the Electoral Districts in which they live to staggered terms. The Chairman of the Board is elected annually by its members. Each member serves a four-year term. This body enacts ordinances, appropriates funds, sets tax rates, and establishes policies for the administration of the County's public services.

The County provides a full range of services, including law enforcement, fire protection, and recreational activities. Water and Sewer services are provided through the legally separate James City Service Authority (JCSA). The Board of Supervisors of James City County serves as the board of directors of the JCSA. The financial activity of the JCSA is included as an integral part of the County's financial statements. The County is also financially accountable for the legally separate Williamsburg-James County School Board and the legally separate James City County Industrial Development Authority, both of which are reported separately as discretely presented component units within the County's financial statements. Additional information on each of these legally separate entities can be found in note 1(a) in the notes to the basic financial statements.

The annual budget serves as the foundation for the County's financial planning and control. In the spring of each year, departments and agencies of the County are required to submit requests for appropriation to the County Administrator . The county Administrator then submits to the Board of Supervisors a proposed operating and capital budget for the fiscal year commencing the following July 1. The operating budget and capital budget include proposed expenditures and the means of financing them. Public hearings are conducted to obtain citizen comments.

Prior to June 30, the budget is legally enacted through passage of an Appropriations Resolution. The Appropriations Resolution places legal restrictions on expenditures at the fund and function level. The appropriation for each fund and function can be revised only by the Board of Supervisors; however, the County Administrator may amend the budget within functions. Budget to actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the general fund, this comparison is presented on pages 57-61 as part of the required supplementary information other than management's discussion and analysis. For governmental funds, other than the general fund, with appropriated budgets, this comparison is presented in the other supplementary information subsection of this report which starts on page 65.

Economic Condition and Outlook

James City County has a strong, diverse and growing economic base. The value of taxable real property grew by 12.6% from July 2003 to July 2004, despite the disruptions caused by Hurricane Isabel in September 2003, and a similar increase is expected over the next 12-month period. Several new retail clusters are breaking ground or are under construction and, after three years of modest growth, are projected to increase 6% to 8% per year

The County's largest taxpayer, Anheuser Busch, Inc. is undergoing a three-year, $200 million modernization to its James City County brewery. Continuing commercial investment in the GreenMount, Stonehouse and New Town areas of the County has and will create additional jobs, and the unemployment rate in the County (2.5%) is lower than state and federal averages. Significant new investment in road infrastructure and continuing development of both the state and federal properties at Jamestown are expected to continue, anticipating the 400 anniversary of the English colony at Jamestown in 2007.

The County enjoys bond rating of Aa3 from Moody's and AA from Standard and Poor's. These bond ratings are based on analyst recommendations after a review of economic and fiscal performance, fiscal policies and practices, current debt outstanding and evidence of financial planning to meet future capital needs. These ratings are excellent for a community the size of James City County and give the County additional leverage in the bond market for potential bond buyers and investors.

Major Initiatives

In FY 2004, the County continued to utilize its Strategic Management Plan as a framework for planning and accountability and continued to seek out new partnerships to help achieve its goal.

The County continues to balance its service demand with available resources. The County entered into a $14.5 million capital lease obligation to finance an 800 MHz radio system. The County was awarded federal, state, and local grants totaling more than $10.7 million, which helped offset costs for damages and cleanup associated with Hurricane Isabel, police training, youth programs, and environmental efforts.

The County continues to work to enhance the character of the community. The Protecting Resources in Delicate Environments (PRIDE) Program, which helps educate citizens on the importance of watershed protection, installed a rain garden at a local church, and partnered with Parks and Recreation and the James River Association to enhance water quality and the watershed at Powhatan Creek. Funding was also set aside for Freedom Park , site of the oldest free black settlement in America , in preparation for the Jamestown 2007 event.

Promoting a healthy community is also very important to the County. Homeland security took center stage as police officers completed training on hazardous materials, terrorism awareness, and extremist groups. Officers also received Project Lifesaver training to help locate Alzheimer's patients if they wander from home or a care facility.

To ensure broad-based citizen involvement, the Board of Supervisors adopted the 2003 Comprehensive Plan and Lane Use Map after a yearlong citizen update process. Comments were received via e-mail, letters, mail-in cards, listening station postings, and attendance at a series of town meetings called "Community Conversations." All comments were compiled and reviewed by the Community Partnership Team (CPT), a group of citizens who met weekly to plan and implement methods for encouraging citizen feedback.

Economic Development

Economic Development had healthy business activity in FY 2004, as Wal-Mart acquired an additional 243 acres for a $28.5 million expansion of its import distribution center at GreenMount Industrial Park .

Stonehouse Commerce Park experienced capital investments during the year, and new jobs should be added in the County. Wythe Will Distributing is building a $4.5 million, 110,000 square foot facility where it will employ an additional 55 workers over the next few years. Nicewood Enterprises, Inc., acquired an existing 40,000 square foot manufacturing facility and expects to invest $2.4 million and create an additional 23 new jobs. Lumber Liquidators will move its headquarters, manufacturing, and distributions to Stonehouse Commerce Park . This hardwood flooring company acquired an existing 309,000 square foot building and will bring $4.5 million in equipment, and expects to bring up to 300 jobs.

Financial Planning

The Board of Supervisors has established a Comprehensive Statement of Fiscal Goals. Included in this is a goal to keep the fund balance designated for Fiscal Liquidity at the end of the fiscal year, equal to, no less than 8%, with a target of 12% of the total operating budget (General Fund plus the County's share of the Component Unit Schools). In FY 2004, the fund balance designated for Fiscal Liquidity is 8.4% of the total general governmental expenditures.

Capital Improvement Program

James City County will continue to face challenges over the next several years. Several years of population growth have produced demands for public services and facilities. The five-year Capital Improvement Program totals $76,439,479 and focuses on a wide variety of needs. An indication of anticipated impacts can be seen in the adopted budget and capital improvements program for the fiscal year beginning July 1, 2004.

In FY 2005, funding is included for design and engineering costs for the third high school and renovations of other school facilities. Funding is also provided for development of additional office space for departments at the Human Services Center to eliminate leased facilities. Future planning includes a third high school, sports stadium, and site improvements for the Historic Triangle Campus of the Thomas Nelson Community College and the County's animal control facility.

Debt Administration

The Board, of Supervisors has three targets relating to debt administration in its Statement of Fiscal Goals.

1) Debt will be no more than 3% of assessed valuation of property.

The County's debt was 0.97% of assessed valuation of property for FY 2004 and can be found on Table IX in page 83 of this document.

2) Debt Service Costs will not exceed 10 to 12% of total operating expenditures, including the County's share of the Component Unit Schools.

The County's debt service for FY 2004 equaled $9,300,903, or 6.53% of total general governmental expenditures. This can be found on Table X on page 84 of this document.

3) Debt per capita will not exceed $2,000.

The County's debt per capita equaled $1,222 and can be found on Table IX on page 83 of this document.

All of these targeted goals were met well within the guidelines for FY 2004.

James City Service Authority

The financial statements of the JCSA are included in this report in accordance with accounting principles generally accepted in the United States of America . The JCSA, for legal and management purposes, issues its own comprehensive annual financial report which is audited and available from the Department of Financial and Management Services.

The Board of Directors has authorized water and sewer operations for the JCSA within the Primary Service Area (PSA) in the County. The JCSA also provides water and/or sewer service to limited sections of York County and the City of Williamsburg with the concurrence of the appropriate governing bodies. The JCSA's operating funds are self-supporting, and the JCSA receives no share of any local or property tax levies.

The JCSA's water system includes the central water system with 21 well facilities and eight independent water systems with nine well facilities. There are approximately 294 miles of water transmission and distribution lines throughout the entire system. The water system facilities supply approximately 4.1 million gallons of water per day to 15,657 water customers.

The JCSA's sewer system includes 76 pump stations with approximately 346 miles of sewer collection lines. The sewer system facilities collect and move approximately 4.2 million gallons of sewage per day for 16,605 sewer customers. The JCSA has no sewage treatment facilities. Sewage treatment for areas served by the JCSA, as well as for other Hampton Roads communities, is provided by the Hampton Roads Sanitation District.

The JCSA currently has groundwater permits for its central system to withdraw 7.0 million gallons per day to support the residential and commercial customers. With the current rate of growth, it is estimated that this amount of water will meet the County's needs through 2013. The JCSA is pursuing separate initiatives to meet its long-term water demand by participating in a regional effort to supplement the JCSA groundwater with surface water or desalinated groundwater. Water Conservation is also an important component of meeting the future water needs. The JCSA has initiated the "Let's be Water Smart" program which is a partnership with local businesses involved in the landscape industry. The partnership promotes the importance of using water wisely.

JCSA is currently pursuing a major upgrade project for the Lift Station 1-2 ( John Tyler Highway ) service area. This rather large service area is developing rapidly. And the existing collection and conveyance system is currently operating near maximum capacity. JCSA has entered into an interest participation agreement with HRSD to construct a new 30-inch HRSD force main along Monticello Avenue Extended, from Powhatan Creek to an existing HRSD interceptor force main on Strawberry Plains Road . JCSA is constructing a new (larger) pump station to replace the existing Lift Station 1-2, and a force main along Powhatan Creek, to convey wastewater flow to the proposed HRSD main. These improvements will be completed during FY 2005.

Treasury Management

A conservative cash management system is carried out by the County Treasurer . Temporary idle funds are automatically invested overnight in repurchase agreements that are secured or collateralized by government securities as required by the Code of Virginia. Funds that are available for a longer period of time are part of a comprehensive investment strategy that maximizes short-and medium-term interest rate.

Risk Management

In our opinion, the County maintains a practical insurance program through a variety of vendors which affords adequate protection against loss and includes comprehensive public liability insurance for bodily injury and property damage.

Awards of Achievement

The GFOA awarded a Certificate of Achievement for Excellence in Financial Reporting to James City County for its Comprehensive Annual Financial Report for the fiscal year ended June 30, 2003.

In order to be awarded a Certificate of Achievement, the County must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such reports must satisfy both accounting principles generally accepted in the United States of America and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. We believe our current report continues to conform to Certificate of Achievement Program requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate.

Acknowledgments

The County has established and continues to maintain a strong and stable financial position through progressive management of financial operations and through sound accounting and financial reporting practices. Appreciation is expressed to the Members of the James City County Board of Supervisors and all of the Constitutional Officers for their interest and support in planning and conducting the financial operations of the County in a responsible and progressive manner.

The preparation of this report could not have been accomplished without the extensive effort and efficient services of the staff of Financial and Management Services. We would like to express our appreciation to each employee of the Department who assisted with the annual audit and preparation of the financial statements.

Respectfully submitted,

Sanford B. Wanner, County Administrator

John E. McDonald, Manager of Financial and Management Services