The Rothschild-Caesarea Foundation should stop diverting philanthropic funds dedicated for Israeli higher education towards subsidizing the local golf club, sports club and Caesarea municipal services, snarled the Government Companies Authority after a damning report of the foundation's management and priorities from Israel's top watchdog, the state comptroller.

Most urgently, in its 2011 report, the State Comptroller Report urged reevaluation of the foundation's sweetheart tax status. The watchdog also suggested that the fund bring its management practices into compliance with the rules governing government companies.

The Rothschild-Caesarea Foundation was established in 1962 as a trust jointly owned by the Israeli Government and the family of Baron Edmond de Rothschild. It was tasked with developing a 7,400-acre swath of land around Caesarea that the baron gifted to the State of Israel in 1948. Both the Rothschild family and the state agreed that all profits from the foundation's land holdings would be used to advance higher education in Israel. The agreement was later extended through 2022.

Open gallery view A golf course in Caesarea. Credit: Nimrod Glickman

In the last couple of years the Israeli government has been aggressively renegotiating its business contracts and levying retroactive taxes on the country's commercial empires. But the Rothschild-Caesarea foundation continues to utilize government-owned land as it sees fit, without even paying leasing fees to the Israel Land Administration, which manages public land in Israel.

In fact, the foundation has enjoyed exemption from both income tax and real estate capital gains tax throughout its 50-year history, while acting outside of its mission. Its special tax status has no legal foundation, and yet persists in defiance of a state comptroller's report from 2000 pointing out that tax breaks require explicit Knesset approval.

Although past finance ministers have repeatedly promised to write the foundation’s special tax status into law, no such legislation has been proposed in Knesset.

Open gallery view The Caesarea Golf Residence neighborhood. Credit: Nimrod Glickman

Vast sums at stake? Yawn

The special status of the Rothschild-Caesarea Foundation was first brought up for discussion in 2006 by Eyal Gabbay, then manager of the Government Companies Authority and Yaron Zelekha, the fiercely reform-minded accountant-general of the finance ministry.

They proposed to either revoke the foundation's tax-exempt status or to break up its holdings and put them to productive use. Their recommendations were presented to the then ministers of finance, justice, interior and education, who did nothing, though several hundred million shekels were at stake.

Come 2010, the Tax Authority assessed that the foundation owed NIS 145 million on its earnings from 2004 to 2008. This decision is now being litigated in Israeli court.

In his office’s 2011 report, State Comptroller Micha Lindenstrauss noted major problems with the management of the Rothschild-Caesarea Foundation's operations. These include risky investment practices, expenditures unrelated to its core philanthropic mission and low funding of projects that fulfill its mission of advancing higher education in Israel.

The report said that the foundation's board members failed to comply with a previous state comptroller report from 2007 directing the foundation to pursue a conservative investment strategy. Instead, it said board members continued to make mostly high-risk investments - leading to the loss of NIS 87 million in fiscal year 2008.

Only in fiscal year 2009 did they shift most of the foundation's portfolio into low-risk investments, the report said.

The 2011 comptroller report also highlighted the foundation's poor management, including the pursuit of risky investments, spending unrelated to its core philanthropic mission – witness the support for golf, and the fact that it only allocated a tiny fraction of its means to advancing higher education in Israel.

Finally, the state comptroller’s report said that board members donated a fraction of what they could have to higher education over the foundation’s history.

In 2010 the foundation's assets grew to NIS 1.3 billion due to the development of the land it manages, including in the seaside city of Caesarea and at Kibbutz Sdot Yam. Despite these gains, board members never discussed increasing the proportion of the foundation's profits dedicated to philanthropy since the number was last set in 1989.

In 2010 the foundation awarded only NIS 21 million in grants out of NIS 467 million in net profits. This was equivalent to only 4.4 percent of its total assets.

In its follow-up report, the Government Companies Authority reiterated that the foundation should increase its contribution rate. It also called on the foundation to create guidelines to ensure that it only contributes to causes related to its mission. It must, said the GCA, stop directing higher education funding to a golf club, a sports club and municipal services in Caesarea.

The Rothschild-Caesarea Foundation's response to the state comptroller’s report was to call the Government Companies Authority's statements a violation of the original agreement between the Israeli government and the Rothschild family.

Both parties had agreed to base the foundation's grants on its profits rather than its assets, which "must be safeguarded to sustain the foundation in perpetuity," the foundation rebutted.

"The Israeli government cannot at the same time seek to benefit from the land bequest it received and fail to live up to its own responsibilities," the foundation said. "The government must note that going back on its obligations enumerated in earlier agreements would require it to relinquish the rights it received in the original bequest."

This is not the first time the Rothschild-Caesarea Foundation has come under fire from the State Comptroller. In 2010, controversy engulfed the Caesarea Industrial Park, which the foundation owns. In that case, four regional councils adjacent to the industrial park—which declared NIS 31 million in income in 2010—sought legal rulings that to establish it as partially or wholly within their jurisdictions.

A 2009 state comptroller report noted that the Rothschild-Caesarea Foundation agreed to increase its payments from $1.2 million to $3.5 million through 2022 in exchange for preserving the municipal status of its "golden egg." But it said the foundation then declared these payments part of its obligatory annual contributions to Israeli higher education rather than counting them against its revenue. The report called this move a clear violation of the foundation's agreement with the government to view philanthropic grants as charity rather than an expense.