The Tyrone Area School District was among five western Pennsylvania School Districts affected by an illegal pyramid scheme involving a public not-for-profit company that was a front for the scheme, according to Pennsylvania Auditor General Jack Wagner.
The school districts borrowed more than $1 million for exercise equipment and other services from the National School Fitness Foundation. The information came to light as a result of audits of the five districts.
According to a press release from the auditor general’s office, at least 13 school districts in the state and a career center have done business with NSFF. U.S. and state authorities in Minnesota and a number of other states are also investigating the organization.
The Tyrone Area School District borrowed $112,396 to participate in the program.
According to yesterday’s press release, NSFF’s pyramid scheme paid off early investors with funds raised from later participants; school districts were required to pay the entire cost of the contracts upfront as NSFF pledged to fulfill the entire expense through voluntary contributions back to the districts.
The release stated the first districts that signed contracts with NSFF received voluntary contributions that in reality were payments from districts that signed on later. Wagner’s office warned school districts about NSFF in May 2004.
The Daily Herald reported in early April 2004, Tyrone Area had entered into a lease with Dollar Bank Leasing Corporation to purchase fitness equipment for the elementary school, with the cost to be reimbursed through NSFF. In March of 2004, the school board approved entering into a 36-month lease for the amount of $112,395.70 to finance the program. The district agreed to pay an interest rate of 3.3 percent and was to receive reimbursement from the NSFF.
The Herald previously reported the NSFF was founded in March 2000 as a nonprofit organization. The program served hundreds of thousands of students at several hundred schools throughout the country.
The auditor general’s office said NSFF was based in Utah and marketed its program to school districts as a method of reducing school-age obesity.
The auditor general noted state law requires districts to solicit competitive bids for contracts at or exceeding $10,000 unless exempted by the Department of Education. Two of the five school districts applied for and received waivers from the PDE freeing them the mandated bidding process.
The auditor general’s office said the other three districts including Tyrone purchased the equipment from NSFF without seeking either competitive bids or waivers.
State school districts were notified in May 2004 of a Minnesota investigation against NSFF. The notice warned against doing business with NSFF. However, Tyrone and the other districts had already entered into contracts with the organization by that point.
The auditor general’s press release said NSFF filed for Chapter 11 bankruptcy protection in June 2004. A month later, on July 26, 2004, the U.S. Attorney for the District of Minnesota announced that the owner and president of School Fitness Systems, a major supplier of fitness equipment to NSFF, had pleaded guilty to bank fraud, mail fraud and wire fraud in a scheme to defraud Minnesota of more than $1 million.
The auditor general’s office noted the defendant later admitted in court that he knew NSFF’s financial position was precarious and contributions to districts from NSFF were paid almost wholly through subsequent school district contract purchases, not from government or private donations as the organization claimed.
According to the information released by the auditor general’s office, NSFF did reimburse three of the five districts. However, the reimbursement totals were less than what the districts have or will pay in principle and interest on the loans. The districts plan to continuing paying on their loans.
Tyrone Area and another district did not receive voluntary contribution payments from the organization.
The auditor general’s office reported Tyrone Area received no equipment from NSFF. The district paid the balance of its loans. According to a written response to the auditor general’s findings, Tyrone Area officials told the auditor general’s office they are confident they will recover their money paid because the funds were released and no fitness equipment was received by the district.
Tyrone Area superintendent Dr. William N. Miller told The Daily Herald this morning, “We paid for the equipment without receiving it, the reason being that was equipment that was to be placed in the elementary school. We had to put a hold on it because we didn’t have a place to put it and we had to wait until the end of the school year.”
He explained the area where the equipment was to be placed needed some renovations to fit the equipment and the area was already in use.
“We didn’t attempt to recover the money immediately,” said Miller. “The accounts were frozen so we were unable to secure that.”
Miller said the district expects to recover the money through the bankruptcy courts.
He said, “We would be in a priority position along with a number of districts.”
Miller said once the funds are recovered, the district would purchase the equipment. Instead of using it in the elementary school, the district plans to place it in the middle school, along with additional equipment, as part of a fitness center that would be used by students and the community. Miller said the district expects to receive the recovered monies by the end of the year.
“The reality of it is we should have those funds in time to purchase that equipment when the middle school is remodeled and added to…”
The district is in the midst of a renovation and addition project to its middle school. The project is expected to be completed early next year and ready for use in the 2006-07 school year.
The auditor general had previously released audits detailing agreements other districts had with NSFF. Wagner’s office said audits for several other districts are pending and regularly scheduled audits in the coming months could reveal the scope of NSFF’s dealings with Pennsylvania school districts.
