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In Vatican City, a Cardinal Works to Balance Budget

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As Head of Tiny Country, Edmund Szoka Tackles Traffic, Pushes Retail
Cheap Gas, Perfume and Pasta

By Gabriel Kahn

Wall Street Journal
April 7, 2005


The late Pope John Paul II earned praise for his role in facing down communism. One of Cardinal Edmund Szoka's contributions to the Roman Catholic Church has been an injection of capitalism. The 77-year-old former archbishop of Detroit is president of the Governatorate of Vatican City, the closest thing this tiny city-state has to a mayor. Two years ago, Cardinal Szoka moved the Vatican's department store out of a glum basement and into the former train station, a spacious, refurbished stone building behind St. Peter's Basilica. New merchandise was added: high-end perfumes, $3,000 Longines watches and flat-screen TVs from Panasonic.

On a recent day, two women in fur coats got makeup advice from a young clerk while Brazilian pop music played in the background. Nearby, shoppers snatched up cartons of tax-free cigarettes, sold for 30% less than they fetch just outside the walls of Vatican City in Italy. "The store is doing pretty well," the cardinal says, though he notes there has been a drop-off since year-end sales ended. "Before Christmas, it's fantastic."

In an enclave where prayer and theological study dominate, Cardinal Szoka (pronounced "show-ka") tackles traffic snarls, parking problems and especially finance. "My job is basically to run this country," he says. "My biggest problem is maintaining a balanced budget." Since being assigned to his current post in 2001, he has boosted the Vatican's retailing operations, which now account for 53% of the city-state's annual budget of about $190 million. Revenue from the Vatican Museums, including admissions and gift-shop sales, makes up an additional 19%, while odds and ends such as the sale of stamps and coins issued by the post office provide the rest. Without that cash, the Vatican wouldn't be able to pay its electricity bill or the salaries of its 1,500 employees, including 63 full-time gardeners.

"Everything else," says Cardinal Szoka, "is all costs." By comparison, the budget of all Catholic parishes in the U.S. amounted to $6.6 billion in 2000, the most recent year for which figures are available. That ended in 1870, when armies of the newly united Italy wrested Rome from Pius IX. The Vatican was reduced to its current 108-acre estate in the middle of Rome. That pope refused to recognize Italy and spent the rest of his days holed up inside.

The loss of taxes left the city-state with a cash-flow problem. With a population made up primarily of priests, nuns and church workers, it didn't have much of a tax base. But the Vatican eventually realized it could leverage its tax-free status. Today, one of the Vatican's most lucrative sources of income is a two-pump gasoline station located about 50 yards south of St. Peter's. A steady stream of cars pull up to fill their tanks with gas that costs up to 30% less than it does in Italy because it isn't taxed.

The cheap gas is so sought after that the Vatican allows only people with special residence or work permits to fill up. Otherwise, it could risk causing friction with Italy, which loses tax revenue every time an Italian buys gas inside the Vatican. "If we didn't have that restriction, I wouldn't have any financial problems at all," says Cardinal Szoka.

In fact, shopping inside the Vatican is so desirable that it is considered one of the major perks of working there. The Vatican sets an allotment on certain items, to make sure the goods are used for personal consumption and not resold in Italy. Tim Janz, an archivist at the Vatican Library, buys his maximum allotment of five cartons of cigarettes a month. "They're cheaper by about 50 euro cents [64 U.S. cents] per pack. I buy Chesterfields," says Mr. Janz, who specializes in Greek manuscripts.

Duty-free shopping is one of the few economic benefits the Vatican can offer its 1,500 employees. Another 2,500 people who work at the Roman Curia, the bureaucracy that does the business of the Catholic Church, also have access to the Vatican's shops. Salaries at both are low compared with pay scales in Italy. A new middle manager earns a net monthly salary of about $1,880, plus an annual bonus equal to a month's pay.

Still, a steady job at the Vatican is considered prestigious in Rome. Each year, more than 4,000 applicants shoot for a handful of empty spots. Few ever quit their jobs, and firings are extremely rare. "It's not like the auto industry," says the cardinal, a native of Michigan.

While tourists can shop in the Vatican Museum gift store, access to most Vatican stores is primarily limited to those who live or work there. Still, many outsiders still manage to get in, including embassy employees, delivery people or others who have business in the city-state. Some use a family connection. On a recent afternoon, Michelangelo Rossi scouted for a parking space near the Vatican supermarket. Though he doesn't work at the Vatican, he has been coming here most of his life, using a pass provided by his father, a longtime employee. "The prices and quality of everything from the pasta to the meat are better than what you find elsewhere," he says.

This doesn't bother Cardinal Szoka. "Let me put it this way: If you can legally get into Vatican City State, it's like any other place. It's like France. You can buy anything you want." The city-state is actually home to two cash-strapped entities. The term Vatican refers only to the small physical territory owned by the Church inside Italy. The political entity of the Catholic Church is known as the Holy See, and operates under a separate budget that is only a little bit larger than the Vatican's. The local Catholic Church of each country usually owns and administers all church property there, but the Vatican has no direct control over those assets.

Both the Holy See and the Vatican have endowments that are invested very conservatively and generate modest returns, say advisers to the Church. The Holy See's budget is handled by an office called the Administration of the Patrimony of the Apostolic See, known by its Italian acronym, Apsa.

The office doesn't publish financial figures. But according to a person with knowledge of its operations, Apsa's total budget is roughly $250 million, a sum which must cover the salaries of 2,500 employees of the Roman Curia. Most of that money comes from the return on its investments, from several hundred apartments it rents out in Rome, many at a below-market rate, and from contributions from local bishop's conferences. The American bishops kick in about $8 million a year, for example.

The finances of Church hierarchy were mismanaged for years, presided over by clerics with scant understanding of accounting or commerce, according to people familiar with the situation. Apsa ran a deficit for 23 consecutive years. The shortfall had to be made up with donations. It returned to the black in 1994.

A turning point came when the Istituto per Opere Religiose, known as the Vatican bank, got mixed up in the collapse of the Italian bank Banco Ambrosiano. The Vatican bank held a small stake in Ambrosiano, and Italian magistrates said the Vatican bank was partially responsible for Ambrosiano's $1.5 billion in bad debts. The Holy See didn't acknowledge liability in connection with Ambrosiano's collapse, but later paid a fine of more than $244 million to Italian authorities investigating the matter.

Ambrosiano's president, Roberto Calvi, was later found hanging from Blackfriar's Bridge in London in 1982, in what United Kingdom authorities say was murder. Mr. Calvi's murder was never solved.

Cardinal Szoka was first called to the Vatican in 1990 to help straighten out finances. In Detroit, he had developed a reputation for openness and had been an effective cost-cutter. He closed or consolidated 30 parishes in order to keep his diocese running at a time when jobs in the local auto industry were disappearing.

Pope John Paul II appointed him president of the Prefecture for Economic Affairs of the Holy See, the office which does the bookkeeping at the Vatican and the Holy See. There were no computers in the office at the time, so Cardinal Szoka persuaded a foundation to donate some. He brought in Ernst & Young to modernize the bookkeeping. Then he helped launch a broad cost-reduction program at all the curial offices that included cutting overtime and travel.

When he was appointed to head up the Vatican City State in 2001, he found another headache awaited: traffic. "It was a mess here with all those cars," he recalls. Though there are only a few streets in the hilly Vatican enclave, they were often clogged. Some people were simply taking a shortcut through the Vatican in order to avoid the Roman gridlock outside, which enraged the cardinal. He tightened up traffic laws and oversaw the construction of two underground garages to ease congestion.

Though fewer than 500 people live inside the Vatican, Cardinal Szoka still must supervise all the functions of a microstate. That includes managing the Vatican's efficient post office, issuing passports and dealing with a state pension system that he describes as "underfunded." "We're going to have to add a good chunk of money to it," he says.

That's not a job that Cardinal Szoka is likely to complete. Vatican employees are subject to mandatory retirement at age 75. He submitted his resignation to the Pope upon reaching that mark two years ago, but was asked to stay on. Now, as the leadership of the Church changes, there will be a new opportunity to re-evaluate the Church's conservative approach to investing.

One of the effects of that strategy has been to stash most of its money in dollar-denominated assets, even though the Vatican and the Holy See keep their books in euros. The Vatican doesn't like to quickly move its money in and out of investments, preferring instead a system of stable, steady returns. The depreciation of the dollar against the euro has hit the Church hard, the cardinal says.

An outside financial adviser to the Vatican says he has urged the Church to be bolder with its investments and its assets. Mortgages could be taken out on many Church buildings to raise cash, he says, and artworks could be used to back bonds. That is an approach the current hierarchy has steadfastly resisted. Cardinal Szoka says he feels it is improper for the Church to leverage its assets that way.

"It's not my money; it's the money of the Holy See. And because of that responsibility, I feel that I have to deal with it in a very conservative manner," he says. "If it were my own money, personally I would be much more aggressive."


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