In Postgresql, Sequence numbers set to start at 1, but is actually returning new records with id of 2?

Using setval('sequence',1) sets the start value of the sequence to 1. But when a record is inserted, the first 'sequence' number is actually 2.

How do I get the actual first record to have a sequence number of 1?

From the fine manual:

setval
Reset the sequence object's counter value. The two-parameter form sets the sequence's last_value field to the specified value and sets its is_called field to true, meaning that the next nextval will advance the sequence before returning a value. [...]

SELECT setval('foo', 42);           Next nextval will return 43
SELECT setval('foo', 42, true);     Same as above
SELECT setval('foo', 42, false);    Next nextval will return 42

So calling setval('sequence', 1) sets the sequence's current value to 1 and the next value will be 2. You probably want the three argument form of setval:

setval('sequence', 1, false)

so that the is_called flag on the sequence will be false and nextval('sequence') will be 1. Also note that the default value for columns bound to sequences is nextval('sequence').