Alberta government must embrace new fiscal approach to keep ‘Heritage Fund’ promise

In the provincial budget released Thursday, the Smith government promised to restore Alberta’s Heritage Fund to get Alberta off the resource revenue rollercoaster. This is a positive step forward, but the devil’s in the details. To avoid repeating past mistakes that have limited the fund’s growth, the Smith government can learn from Alaska’s Permanent Fund, which has grown to US$77.0 billion while paying more than US$29.0 billion in direct dividends to Alaskan citizens since 1982.

First, a bit of background.

The Alberta government created the Heritage Fund in 1976/77 to save a share of the province’s resource wealth for the future. Historically, however, rules that would have helped ensure the fund’s growth (for example, a requirement to deposit 30 per cent of resource revenue annually) were “statutory” rather than “constitutional,” which meant governments could easily disregard, change or eliminate these rules once they were no longer convenient.

As a result, after an oil price collapse, the provincial government stopped consistently contributing resource revenue to the fund in 1987/88, the real value of the fund eroded over time due to inflation, and nearly all fund earnings have been spent. Correspondingly, the Heritage Fund currently sits at just $20.9 billion.

Now consider Alaska’s resource revenue savings fund—the Permanent Fund, which, unlike Alberta’s fund, adheres to robust fiscal rules.

First, according to Alaska’s constitution, the state government must deposit 25 per cent of all mineral revenues into the fund each year. A constitutional rule of this nature is much stronger than an equivalent statutory rule. Second, the government must set aside a share of the fund’s earnings each year to offset the effects of inflation—in other words, “inflation-proof” the principal of the fund to preserve its real value. Finally, the government must pay a portion of fund earnings to Alaskan citizens in annual dividends. As a result of these rules, the fund has grown steadily since its inception in 1976/77 (the same year Alberta created its fund).

The logic of the first two rules is straightforward—the Alaskan government promotes growth in the fund by depositing mineral revenue annually, and inflation-proofing maintains the fund’s purchasing power. Again, Alberta’s Heritage Fund had similar statutory rules, but they were simply too easy to change or ignore. To truly repair the Heritage Fund, the Alberta government should make these rules constitutional, which would make them much more durable and difficult for future governments to change.

Finally, consider the third rule regarding dividends. In Alaska, the state government created the annual dividend, which is paid out annually to Alaskans, to convince citizens of the importance of responsibly maintaining the Permanent Fund, thus creating political pressure for future governments to do so. In other words, because citizens have an ownership share in the fund, they’re more interested in the state maximizing returns from its resource wealth. In effect, the dividend has helped maintain and reinforce robust fiscal rules that make the Permanent Fund successful.

To understand the potential for the Heritage Fund under a similar set of fiscal rules, consider a hypothetical example.

If Alberta had followed Alaska’s model since inception in 1976/77—including 25 per cent annual resource revenue contributions, inflation-proofing and annual dividends—the Heritage Fund would have been worth approximately $234.2 billion by 2019/20 and could have paid $101.5 billion in dividends to Albertans, which would average $1,018 (inflation-adjusted) per Albertan each year.

The Smith government has promised to renew the Heritage Fund. To make good on this promise, Premier Smith should heed lessons from Alaska’s experience and introduce a constitutional requirement for consistent contributions and inflation-proofing, while paying annual dividends to Albertans.