Alberta’s Heritage Savings Trust Fund is forecast to sit around $20-billion by early 2023, in part because of an injection of cash announced by the UCP government last week. It’s a good, long-needed boost for the oil-focused province’s legendary but neglected rainy-day reserve.
In the ups and downs of the resource-revenue roller coaster, Alberta is right now at another peak – one that many didn’t see coming. One of the last acts of the Kenney government will be to use some of the surplus to pay off $13-billion in debt coming due this fiscal year, and also to put almost $3-billion into the Heritage Fund. It’s “the largest amount transferred to the Heritage Fund in a single year since the fund’s inception,” according to Alberta Finance.
However, the future of the fund will continue to be uncertain without future premiers making more solid commitments to its growth, and its purpose. As oil and natural-gas revenues again swoop in to the rescue, this moment is yet another last chance for Alberta to ask how the province injects more stability into its finances – and how much should be saved for the inevitable less-prosperous days.
The fund was created in 1976, and was one of the proudest achievements of Peter Lougheed – who died 10 years ago this month. The big-picture-thinking premier is still revered by many Albertans for good reason. The initial promise of the fund was that 30 per cent of all resource revenues would be socked away.
For decades, revenues from the Heritage Fund have helped build projects, and kept provincial services going, even in leaner years. The government describes the fund as “a source of pride and security in Alberta” in its financial reporting, and that’s not wrong.
But Alberta’s primary long-term savings fund has never reached its full potential. According to the fund’s most recent annual report, its per capita market value has declined since peaking in 1983, when the value was about $12,380 per Albertan. At of the end of 2021, the value was approximately $4,200 per Albertan.
The government estimates that the Heritage Fund will be valued at $19.6-billion at year-end 2022-23. A Fraser Institute study from last year has shown that the fund would be worth approximately twice its value today if it had been inflation proofed since inception.
The per capita decline has been caused by three main factors, says the government. First, annual resource revenue deposits were decreased and then eliminated in the 1980s. Second, most of the fund’s earnings have been transferred into general revenues. Third, Alberta’s population has more than doubled since 1976, growing from 1.9 million people to more than 4.4 million people.
The resource money still sloshing around Alberta today – driven mainly by oil sands production – would be a surprise to a 1970s Peter Lougheed, and others of the time who believed that the province’s key industry then would have faded into the sunset by now. When Mr. Lougheed first floated the idea for a long-term savings fund at a Calgary Chamber of Commerce event in 1974, he estimated that the province had 10 years left to diversify its economy.
In introducing the legislation for the Heritage Fund two years later, with a $1.5-billion initial deposit, he said it must offset future declines in oil revenue. “At the same time, it must be a vehicle for diversification and for strengthening our economy,” he said. “It must do both.”
But by 1982, as oil prices slumped, transfers from natural resource revenues were cut to 15 per cent from 30 per cent. And just before an election, the Lougheed Progressive Conservatives used earnings from the fund to subsidize Albertans’ high-interest mortgage payments.
Mr. Lougheed left office in 1985, as the province’s financial troubles were worsening. An oil-price war sparked a plunge that had crude trading for just US$10 a barrel for a spell in 1986. The next year, the government of Don Getty made the decision to completely end resource payments into the fund.
“The province was on its knees,” former cabinet minister Jim Dinning said in a recent interview, recalling the period. “The economy and the delivery of services was on its knees,” he added. “It was a tough but a necessary decision, at the time.”
Still, subsequent governments never returned to putting a dedicated percentage of resource revenues into the fund, even when economic times were much better. The push to use the fund for economic diversification fell by the wayside. In the Ralph Klein and Ed Stelmach eras, the government legislated inflation proofing, and professionalized the fund’s governance and management. (The fund is now 100 per cent managed by Alberta Investment Management Corp., or AIMCo).
The Klein government also put some surplus money into the fund in the midst of the commodities boom 15 years ago. But the provincial preference for lower taxes but still-high levels of public services – and skimming earnings off the top of the fund for general spending – means the fund’s value has eroded, in inflation-adjusted dollars, over time.
This fiscal year, there’s once again an opportunity for change. Bitumen royalties are forecast to be $20.1-billion, about $9.7-billion higher than budgeted earlier this year. Revenues are bolstered by West Texas intermediate oil prices near US$90 per barrel, but also by more oil sands projects reaching “payout” status – when revenues exceed initial project costs. More producers must now pay significantly higher royalty rates.
Currently, the Alberta Heritage Savings Trust Fund Act says that all of the fund’s income must be transferred to general revenues, less the amount retained to inflation proof the fund. As part of his fiscal update, Finance Minister Jason Nixon said the government will amend the act to provide an option to retain all net investment income in the Heritage Fund.
It’s good that this will be an option but it still leaves wide latitude for future premiers to use and neglect the fund. The winner of the UCP leadership contest will be announced Oct. 6, and a general election will be held next May. And some former finance ministers are skeptical that Alberta governments will ever deviate from more short-term thinking.
Ted Morton, for one, said he applauds the decision to pay off debt and put money into the Heritage Fund, as spending the surplus right now would simply add to existing inflationary pressure. “But what is the point of saving the money if you don’t protect it from being used by the next government to buy off voters in the next election.”
Mr. Dinning said the best thing that the next premier could do is repeat the infusion of cash next fiscal year, when he predicts another large oil-driven surplus. “The more they can put in [the Heritage Fund], the more that is kept away from the ‘have money, will spend it’ thinking that permeates governments of all colours.”
However, NDP finance critic Shannon Phillips said contribution to the Heritage Fund this year is “paltry” given the historic nature of the surplus, and said a broader conversation with Albertans is needed. With the money rolling in, Alberta is getting into territory where the size of the fund could be increased enough so that its annual earnings could pay for a significant amount of social services, such as K-12 education, in perpetuity.
Whenever people talk about the Heritage Fund, Ms. Phillips said she thinks about the labour put in by Albertans to build it up. She is reminded of her electrician father being woken up by a call at 2 a.m. on a -40 night in the early 1980s, and driving his service truck “out through the muskeg” to get an oil rig back up and running. “The value of what he was helping to pull out of the ground is exactly what went into the Heritage Fund.”
Allan Warrack, a former cabinet colleague of Mr. Lougheed’s, told The Globe and Mail more than a decade ago that if the province was being smart, it would forgo some prosperity now to to gain future financial security.
“Economic strength is not just prosperity, but stability,” he said.
Climate concerns will continue to reshape the world of energy, but the province’s industry – and global use of fossil fuels – isn’t moribund as many predicted just two years ago. This era of surpluses is a good chance for Alberta to settle some of its oldest financial questions, which have come up with regularity every decade since the 1970s: What does the province invest in, how do we have stable revenue streams, and how do we further diversify the economy?
Part of that conversation has to be about how we use the Heritage Fund to make sure we have not just prosperity, but stability.
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