By Ellie Ashford
05/04/04 -- Is the National School Fitness Foundation's (NSFF) program too good to be true? The program has provided exercise equipment to more than 600 schools across the country but now Minnesota state officials are raising concerns about the financial stability of the program.
NSFF markets a program, known as "LIFT America," to schools by telling school officials that after they make an up-front payment for fitness equipment and related services they will be reimbursed for their costs.
Schools reimbursed
NSFF claims that it receives the money to reimburse schools from federal grants and contributions from private foundations, but Minnesota officials allege that the company is relying on "royalty payments" from districts it has recently signed contracts with to reimburse districts that have been in the program longer.
State officials have not charged the foundation with breaking the law, but the Minnesota Department of Commerce has requested a hearing be held before an administrative judge to determine whether the foundation should stop doing business in the state.
All of the 19 districts in Minnesota that have signed on with NSFF have received their payments on schedule, says state auditor Patricia Anderson, and school officials contacted by School Board News are satisfied with the program.
The White Bear Lake (Minn.) Area School District's arrangement with NSFF has been "a good investment," says Communications Coordinator Susan Brott. "It allowed us to get fitness equipment we could not otherwise afford, and students have really benefited."
The district, a suburb of St. Paul, has installed a fitness center at the North Campus of White Bear Area Lake High School, which enrolls 1,400 ninth and 10th graders.
P.E. classes and sports teams use the equipment, Brott says. According to the auditor's report, the district's total obligation under its three-year lease is $230,869.
When the Grundy Center (Iowa) Community School District signed on to the program in June 2001, the buy-in was $130,000, says Superintendent John Stevens. The district set up a fitness center in its high school and gives community residents access to the center before and after school.
The arrangement "has gone very well," Stevens says, and the foundation has made all its payments. He acknowledges "there are some naysayers out there" but the LIFT America program "has been good for us. We've made it work for us."
The LIFT America program started in March 2000 and is now in 610 schools, says Christopher M. Rees, vice president for public relations at NSFF, which is based in American Fork, Utah.
According to Rees, the program's goal is to "eliminate the obesity epidemic."
School districts that enter into contracts with NSFF must pay up-front for the entire cost of the program. Districts generally enter into three-year lease-purchase agreements with a local bank to obtain funds for the program, and NSFF agrees to make a monthly "charitable contribution" to the district equal to the district's payments.
Caution urged
In March, Anderson, and Minnesota Attorney General Mike Hatch issued separate reports urging school districts to exercise caution in entering into contracts with NSFF.
"Based on what we now know, I really question the public value of the program," Anderson wrote in a March 1 letter to Hatch.
"The risk seems excessive for public dollars," Anderson says. "It's tempting to try and get something for nothing, but you usually end up paying more for it in the end. My advice to school districts is to not enter into contracts with NSFF until school districts receive audited financial statements and legal questions are answered."
While it appears that NSFF is obligated to completely reimburse school districts for the program, she notes, districts must contractually acknowledge the "potential and business risk" that the foundation might be unable to make its "contributions." If this happens, districts are still liable for the remainder of their lease-purchase payments.
Anderson outlined several additional concerns about the program in the letter to Hatch. These include the failure of districts to enter into contracts with NSFF without seeking competitive bids as required by state law, the mischaracterization of the NSFF agreements as "grants," and the lack of audited financial statements.
Anderson also questions the value of the fitness products provided by NSFF and says districts can get better equipment at less cost. For example, she says, the Robbinsdale, Minn., school district was approached by NSFF and instead applied for and received a $150,000 federal Carol M. White Physical Education Program (PEP) grant which will allow it to place fitness equipment in all of its schools.
"Based on the number of participating school districts, NSFF must raise more than $100 million from government and private sources to meet its current commitments," Hatch wrote in a letter to Anderson.
"This is an enormous amount of money," Hatch says. "Furthermore, as NSFF signs up additional school districts, it must raise even larger amounts of money. If NSFF fails to meet its commitment, a school district's remedies against NSFF are very limited."
'Cease and desist' order
Hatch also notes that the true market value of the fitness equipment being sold by NSFF is about $75,000, while schools pay $200,000 to $250,000. "The remainder of the program price is purportedly used to purchase training materials," he says.
Following the investigation by the state auditor's office, the Minnesota Department of Commerce on April 19 issued an "order to show cause" why the NSFF and its authorizing agent, School Fitness Systems (SFS), "should not be required to cease and desist these activities in Minnesota."
The order states that a hearing will be held to determine whether these entities violated state law on securities and whether they made "fraudulent or deceitful statements, material misrepresentations, or omissions" concerning the LIFT America program.
The order notes that on a typical sale, a school pays $223,000 to School Fitness Systems, which covers the cost of equipment, training, and shipping; a $3,000 fee to SFS; and a "royalty payment" of approximately $134,000 to NSFF.
"NSFF and SSF have represented to participating school districts that LIFT is 'free' to the districts because NSFF will procure government, corporate, and private grants to reimburse the districts," the order states. "In other words, districts are advised they will receive all of their money back with interest, plus the free equipment, through the efforts of NSFF."
However, the order indicates, IRS reports show NSFF's fund raising doesn't appear to be keeping pace with its obligations to school districts and that royalty payments accounted for 99.8 percent of NSFF's revenue in 2003.
Hatch told the Duluth New Tribune that the agreement has the appearance of a Ponzi scheme. "The problem with a Ponzi structure is there are not enough people buying to keep the whole system afloat," he says.
Schools warned of risk
Rees says the Minnesota reports are "having a negative impact on our fund raising. We hope to move past this and come to a quick resolution."
Since the program started, "we have had some criticism that it sounds too good to be true. We hear it all the time," Rees says. "It just motivates us to work even harder to raise funds and fight the obesity epidemic."
Rees acknowledges "there is a lot of risk involved." But he says school officials "know all of the charges up front [and] are aware of the risk."
To reduce the risk factor, Rees says, the foundation recently approved a new four-year model with a guarantee that the foundation will pay for one-quarter of the cost of the program.
To participate in LIFT America, schools must agree to allocate 1,800 square feet for a fitness center, implement the LIFT America curriculum, and track fitness data for students and report the results to the foundation. The foundation promises to keep the data confidential.
Participating districts receive a variety of strength machines and aerobic machines, such as treadmills, ellipticals, and spinning bikes.
The foundation sends trainers to schools to explain the curriculum to teachers and teach them how to use the fitness equipment. Schools also receive an emergency response medical kit, automated external defibrillator, and two "high-tech kiosks."
The kiosks use "bioimpedance technology" to measure percent of body fat and body mass index, Rees says. Students place their hands on disks and the data is automatically transferred to the school's online database.
The foundation's data show that the average high school class participating in the program loses 15 percent of body fat per semester and shows a 24 percent increase in strength.
Rees says NSFF has received $34 million worth of in-kind donations, much of it from individuals in the form of "art and sculpture," which has not yet been sold, and contributions from various foundations and companies, including $113,000 from the Hoblitzelle Foundation and donations from the C. Charles Jackson Foundation, Zion Bank, Compaq, Wells Fargo, and others.
He says NSFF has contracted with a fund-raising organization called Compass Charitable Development, also based in American Fork, which has helped school districts raise $6 million in federal PEP grants.
In January, Wisconsin Gov. Jim Doyle announced a three-year, $10 million partnership with NSFF to provide fitness programs in 100 schools.
NSFF encourages schools to open their fitness facilities to the public during non-school hours and charge people to use the machines. Rees says one school in Utah raised $20,000 a year doing this.
Rees concedes that "fund raising is difficult" and says the foundation "encourages every school to do its own fund raising."