Vatican City, Jun 7 (AP) The world's smallest country has a big budget problem.

The Vatican doesn't tax its residents or issue bonds. It primarily finances the Catholic Church's central government through donations that have been plunging, ticket sales for the Vatican Museums, as well as income from investments and an under-performing real estate portfolio.

The last year the Holy See published a consolidated budget, in 2022, it projected 770 million euros (USD 878 million), with the bulk paying for embassies around the world and Vatican media operations. In recent years, it hasn't been able to cover costs.

That leaves Pope Leo XIV facing challenges to drum up the funds needed to pull his city-state out of the red.

Withering donations Anyone can donate money to the Vatican, but the regular sources come in two main forms.

Canon law requires bishops around the world to pay an annual fee, with amounts varying and at bishops' discretion “according to the resources of their dioceses”.

US bishops contributed over one-third of the USD 22 million (19.3 million euros) collected annually under the provision from 2021-2023, according to Vatican data.

The other main source of annual donations is more well-known to ordinary Catholics: Peter's Pence, a special collection usually taken on the last Sunday of June.

From 2021-2023, individual Catholics in the US gave an average USD 27 million (23.7 million euros) to Peter's Pence, more than half the global total.

American generosity hasn't prevented overall Peter's Pence contributions from cratering. After hitting a high of USD 101 million (88.6 million euros) in 2006, contributions hovered around USD 75 million (66.8 million euros) during the 2010's then tanked to USD 47 million (41.2 million euros) during the first year of the COVID-19 pandemic, when many churches were closed.

Donations remained low in the following years, amid revelations of the Vatican's bungled investment in a London property, a former Harrod's warehouse that it hoped to develop into luxury apartments.

The scandal and ensuing trial confirmed that the vast majority of Peter's Pence contributions had funded the Holy See's budgetary shortfalls, not papal charity initiatives as many parishioners had been led to believe.

Peter's Pence donations rose slightly in 2023 and Vatican officials expect more growth going forward, in part because there has traditionally been a bump immediately after papal elections.

New donors The Vatican bank and the city state's governorate, which controls the museums, also make annual contributions to the pope. As recently as a decade ago, the bank gave the pope around 55 million euros (USD 62.7 million) a year to help with the budget. But the amounts have dwindled; the bank gave nothing specifically to the pope in 2023, despite registering a net profit of 30 million euros (USD 34.2 million), according to its financial statements. The governorate's giving has likewise dropped off.

Some Vatican officials ask how the Holy See can credibly ask donors to be more generous when its own institutions are holding back.

Leo will need to attract donations from outside the US, no small task given the different culture of philanthropy, said the Rev. Robert Gahl, director of the Church Management Programme at Catholic University of America's business school.

He noted that in Europe there is much less of a tradition (and tax advantage) of individual philanthropy, with corporations and government entities doing most of the donating or allocating designated tax dollars.

Even more important is leaving behind the “mendicant mentality” of fundraising to address a particular problem, and instead encouraging Catholics to invest in the church as a project, he said.

Speaking right after Leo's installation ceremony in St. Peter's Square, which drew around 200,000 people, Gahl asked: “Don't you think there were a lot of people there that would have loved to contribute to that and to the pontificate?” In the US, donation baskets are passed around at every Sunday Mass. Not so at the Vatican.

Untapped real estate The Vatican has 4,249 properties in Italy and 1,200 more in London, Paris, Geneva and Lausanne, Switzerland. Only about one-fifth are rented at fair market value, according to the annual report from the APSA patrimony office, which manages them.

Some 70 per cent generate no income because they house Vatican or other church offices; the remaining 10 per cent are rented at reduced rents to Vatican employees.

In 2023, these properties only generated 35 million euros (USD 39.9 million) in profit. Financial analysts have long identified such undervalued real estate as a source of potential revenue.

But Ward Fitzgerald, the president of the US-based Papal Foundation, which finances papal charities, said the Vatican should also be willing to sell properties, especially those too expensive to maintain. Many bishops are wrestling with similar downsizing questions as the number of church-going Catholics in parts of the US and Europe shrinks and once-full churches stand empty.

Toward that end, the Vatican recently sold the property housing its embassy in Tokyo's high-end Sanbancho neighbourhood, near the Imperial Palace, to a developer building a 13-story apartment complex, according to the Kensetsu News trade journal.

Yet there has long been institutional reluctance to part with even money-losing properties. Witness the Vatican announcement in 2021 that the cash-strapped Fatebenefratelli Catholic hospital in Rome, run by a religious order, would not be sold. Pope Francis simultaneously created a Vatican fundraising foundation to keep it and other Catholic hospitals afloat.

“They have to come to grips with the fact that they own so much real estate that is not serving the mission of the church,” said Fitzgerald, who built a career in real estate private equity. (AP) PY PY