April 7, 2005
In Vatican City, A Cardinal Works To Balance Budget
As Head of Tiny Country, Edmund Szoka Tackles Traffic, Pushes Retail
Cheap Gas, Perfume and Pasta
By GABRIEL KAHN
Staff Reporter of THE WALL STREET JOURNAL
VATICAN CITY -- 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.
The Vatican's struggle to make ends meet dashes one of the enduring
myths about the Church -- its tremendous wealth. Certainly, the Vatican
is stuffed with mind-boggling treasures. Its museums are filled with
Michelangelos, Leonardos and Raphaels. The value of St. Peter's
Basilica alone is astronomical. But the Vatican has no intention of
ever selling its masterpieces. In fact, it lists all its priceless
works of art, including the Sistine Chapel, on its books at a nominal
value of =801 each, as a way of indicating it prizes their religious
and artistic significance over their financial worth. One outside
financial adviser says he has urged the conservative Church leadership
to invest more aggressively, but to no avail.
Paying the bills wasn't always so difficult for the Catholic Church.
The construction of St. Peter's in the 16th century was financed in
part by the sale of indulgences -- or allowing people to buy
forgiveness for their sins -- a practice considered so corrupt that it
helped spark the Reformation. Through the middle of the 19th century,
the Papal States extended over much of what is present-day central
Italy, providing a steady stream of tax income.
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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