HILL: Smith can’t rely on ‘political will’ to grow Heritage Fund

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The Smith government on Wednesday released its plan to grow Alberta’s Heritage Fund to at least $250 billion over the next 25 years, mainly by reinvesting all investment returns back into the fund. But even Smith recognizes her plan will “take political will over a long period of time.” Of course, political will is subjective and can change from government to government. If Smith wants to establish a sustainable plan to grow the Heritage Fund, it should pay dividends to Albertans.

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First, some quick history. When the Alberta government created the Heritage Fund in 1976, it established a rule that the government must deposit 30% of resource revenue (including oil and gas royalties) into the fund annually. That quickly fell to 15% by 1982-83, and after an oil price collapse the government eliminated the requirement in 1986-87. Since then, governments have routinely failed to make deposits into the fund, the fund’s value (after accounting for inflation) has eroded over time, and governments have spent nearly all of the fund’s earnings. Consequently, this fiscal year the fund will be worth less than $26 billion.

In other words, political will hasn’t been a successful strategy in growing the Heritage Fund.

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Which brings us back to dividends. Here’s where Alberta can learn from Alaska.

Alaska’s resource revenue savings fund (the Permanent Fund) was also created in 1976, but is now worth about US$80 billion (roughly CA$115 billion). What does the Alaska government do differently?

While various rules contribute to the fund’s success, the dividend rule is arguably the most critical. The Alaskan government pays a share of the fund’s earnings to Alaskan citizens via a dividend each year. Crucially, this gives citizens an ownership share in the fund. And therein lies the political will for governments to responsibly grow and maintain the fund. Any government that tried to use the fund for irresponsible purposes (e.g. raid the fund to spend money elsewhere) would likely face the wrath of Alaskan voters, given their understandable attachment to the dividend cheques.

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Indeed, while the Alaskan government can reduce or eliminate the annual dividend, it has consistently allocated funds to the dividend for more than 40 years, even though this reduces the amount of money available for government spending. Overall, the fund has paid out more than US$30 billion to Alaskan citizens via dividends. Last year, each Alaskan received US$1,702.

According to its plan released on Wednesday, the Smith government will rely on “political will” to grow the Heritage Fund. But that’s not a recipe for success. Instead, the Smith government should learn from Alaska’s success and start paying dividends to Albertans who will provide the political pressure necessary to grow the fund over the long term.

Tegan Hill is director of Alberta policy at the Fraser Institute.

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