Heritage fund or Slinky fund?
Lougheed’s dream dimmed, energ y wealth mismanaged
The recent announcement that the Alberta Heritage Savings Trust Fund earned $2.1 billion in 2013 is great news, but don’t break out the champagne yet. While these record earnings will help relieve Alberta’s current budget deficits, they are almost meaningless in the long term — which is, or at least was, the whole point of having a heritage fund.
Why? Because under current government policy, virtually all of the fund’s realized annual earnings are transferred to general revenue for in-year spending. This means the fund’s value cannot grow as the market goes up.
Indeed, when there are down years, such as 2009, investment losses permanently reduce the size of the fund. Combine this with the fact the Alberta government has made only two new deposits in the fund since 1987, and the fund begins to resemble the old Slinky toy — holding steady in good years, but dropping down in bad years — slowly but steadily working its way to the bottom.
Compare how the government manages the fund with how you manage your RRSP. Imagine if you stopped making annual deposits, then began skimming off the gains you made in the good years. Throw in a few years when markets are bad and your investments actually lose money, and very soon your RRSP is not growing in value, but shrinking.
This is certa i n ly not what former premier Peter Lougheed had in mind when he created the fund in 1977. Realizing that at some future point Alberta’s oil and gas reserves would begin to be depleted, Lougheed legislated that each year the government must deposit 30 per cent of all annual non-renewable resource revenues (NRRR) in the heritage fund. In its first five years, the fund grew to $8.3 billion. Early estimates were that it could top $50 billion by 2000.
But this was short-lived. As the price of oil dropped and NRRR declined, the government reduced deposits to 15 per cent in 1982 and then zero in 1986. To make matters worse, the government also began to use a portion of the fund to support “economic diversification” projects through Crown corporations such as VenCap Equities and the Alberta Opportunity Company. Whatever their merits in theory, in practice they soon became political slush funds used to support various ministers’ pet projects through loans, equity and loan guarantees. After losing tens of millions of dollars, they were cancelled by then-premier Ralph Klein in 1994.
The sad fact is that of the $216 billion in NRRR taken in by the Alberta government between 1977 and 2013, less than six per cent has been saved. The fund’s current value, after last year’s earnings are taken out, is less than $16 million.
Compare this with Alaska’s Permanent Fund. Created in 1977, the same year as Alberta’s, the Permanent Fund now has a current balance of $50 billion — and that’s after paying out $20 billion in “dividends” to Alaska residents. Norway’s NRRR savings fund was started later — in 1990 — and now has $740 billion.
How have they succeeded where Alberta has failed?
First, rules prohibited their governments from diverting the required annual contributions back into annual spending, even in years when oil prices and NRRR were low. In Norway’s case, even its annual earnings must be retained within the fund.
Second, the Alaska and Norway funds cannot be used for domestic “economic development,” the kinds of politically useful but economically risky projects Alberta governments indulged in during the 1980s. In short, the Alaska and Norway funds were made “politician proof” by protecting them from the inevitable short-term priorities — i.e., winning the next election — of the governments of the day.
The Alaska and Norway models stand in sharp contrast to Alberta’s track record of managing our NRRR. A recent study of oil-rich countries lumped Alberta in with such stellar countries as Venezuela, Nigeria, Iran, Libya and Azerbaijan as examples of “frequent cases of waste and poor use of public resources.”
Unfortunately, then-premier Alison Redford’s last budget proposes to resurrect the practice of using money in the fund for “strategic investments.” Bill 1, the misleadingly named the “Savings Management Act,” will actually create a new, $2-billion government spending program to “provide government with the financial resources to take advantage of new opportunities, yet to be determined, that may require a large, one-time investment from the province.” Such politically driven “investments” are all but guaranteed to achieve the same dismal results as they did during the 1980s.
The Redford government also said that by 2018, it would begin leaving annual earnings in the fund and resume depositing “a portion” of NRRR into the fund. But promises are just promises, especially when they contradict the last 30 years of practice.
Does anyone really believe that the politicians who will manage Alberta’s finances for the next decade — from whichever party they might come — will be any different?
The PC leadership campaign provides a window of opportunity to avoid going down this failed path yet again.
Which of the three candidates will put the fund back on the track Lougheed originally designed? Who will commit to repealing Redford’s Bill 1? Who will “politician proof” it by constitutionally entrenching the requirements of annual contributions of 30, or even 15, per cent of NRRR? Albertans would like to know.