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Transmittal Letter For the Fiscal Year Ended September 30, 2007 City of San Marcos San Marcos, Texas March 7, 2008 To the Honorable Mayor, Members of the City Council, And Citizens of the City of San Marcos, Texas: The Comprehensive Annual Financial Report (the CAFR) of the City of San Marcos, Texas (the City) for the fiscal year ended September 30, 20071 is submitted in accordance with Section 3.16 of the City Charter. Management assumes full responsibility for the completeness and reliability of all information presented in this report, based upon a comprehensive framework of internal control that it established for this purpose. Because the cost of internal controls should not outweigh their anticipated benefits, the objective is to provide reasonable rather than absolute assurance that the financial statements are free of any material misstatements. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the various funds of the City. The disclosures included in this report are intended to provide the reader a good understanding of the City's financial activities. Pattillo, Brown and Hill, L.L.P., have issued an unqualified ( "clean ") opinion on the City's financial statements for the year ended September 30, 2007. 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 transmittal letter and should be read in conjunction with it. The CAFR includes all funds of the City and is presented in three sections: introductory, financial and statistical. The introductory section includes a table of contents, this transmittal letter, the City's organizational chart, and a list of principal officials. The financial section includes the MD &A, basic financial statements and other required supplementary information, as well as the auditors' report on the financial statements and schedules. The statistical section includes selected financial and demographic information generally presented on a multi -year basis. The single audit is a separate report. The City is required to undergo an annual single audit in conformity with the provisions of the Single Audit Act of 1984, the Single Audit Act Amendments of 1996 and U. S. Office of Management and Budget (OMB) Circular A -133. Information related to this single audit, including the Schedule of Expenditures of Federal Awards, findings and recommendations, and auditors' reports on the internal control structure and compliance with applicable laws and regulations are included in the single audit report. iii