It's the kind of savings scheme that would get a failing grade in any financial planning 101 course: Put aside a little for your retirement when you're young, stop saving for 25 years and spend most of the money you earn in interest.
That's the story of Alberta's Heritage Fund. While the province has also put some money into a rainy-day fund, it's barely enough for emergencies and not something that can be counted on for securing the province's long-term future.
In the real world, nobody in their right mind would spend the investment returns earned on their RRSPs on an annual basis and no one would call their tiny emergency fund a plan for future retirement security. However, this kind of backwards financial planning is exactly how the government of Alberta treats the Heritage Savings Trust Fund.
The Heritage Fund could be so much more - but how we use it is linked to how we collect revenues - corporate taxes, personal income-tax and oil and gas royalties. In the absence of reforms to our revenue system, the Heritage Fund will continue to wither. However, if we take a hard look at our finances and make some adult decisions about how we collect revenues, we're in a position to lead the country in a number of ways - financial stability and economic diversification. The choice is ours.
The Story of the Heritage Savings Trust Fund
The Heritage Savings Trust Fund was established in 1976, with an initial $1.5-billion deposit from royalties and another $620 million from general revenue. Between 1976 and 1982, we saved 30 per cent of our resource royalty revenue and the Heritage Fund grew to $12 billion. This was the high-water mark for the fund. By 1982, Alberta had already ratcheted down the percentage of royalty revenue saved to 15 per cent and, by 1987, we stopped making deposits entirely.
| Stop the Roller-Coaster, say Alberta Professors
There's a way for Alberta to get off the revenue rollercoaster, according to two professors of economics at the University of Alberta. Rather than rely on volatile resource revenues, which go up and down with global oil and gas prices, professors Stuart Landon and Constance Smith propose the province creates a stabilization fund and commit to depositing a fixed percentage of resource revenues into it each year, while withdrawing a fixed percentage of the assets each year to support current spending. This would be an improvement on the existing Sustainability Fund, where deposits and withdrawals have changed frequently at the discretion of government. By 2013, this fund is set to fall to $3 billion, the professors wrote in a column in the Edmonton Journal in November 2010. To avoid putting pressure on current revenue and spending, the proportion of resource revenues committed to the new fund would be increased gradually over the years to a set target level. The professors' C.D. Howe Institute Commentary, Energy Prices and Alberta Government Revenue Volatility, can be found at www.cdhowe.org. |
The Heritage Fund was designed to invest directly in commercial enterprises in Alberta and there were some notable successes, such as jump-starting the petrochemical industry via Nova Corporation and maintaining a government window on the oil industry via the Alberta Energy Corporation (later sold to become EnCana). Other crown corporations included the Alberta Agricultural Development Corporation,
the Municipal Financing Corporation, and Alberta Government Telephones. The fund also had tangible assets - for example, in 1988 it held $3.2 billion in mortgages through the Alberta Mortgage and Housing Corporation.
Don Getty's government stopped adding royalty revenue to the Heritage Fund in the late 1980s, when conventional crude oil prices went into a global nosedive. But a simultaneous global trend was also afoot - a tectonic shift in how we understand government's ability to exercise economic leadership.
Using the Heritage Savings Trust Fund as a way to encourage government-led economic diversification, some level of public ownership and public participation in the economy were ideas that would not withstand the ideological assault of 1980s Reaganomics. By that time, it was fashionable to claim that government had "no business being in business."
Government stopped the private investment functions of the Heritage Fund in the late 1980s, and in 1996 outlawed the practice. In the 1990s, the Heritage Fund sold its investments in AGT to Telus and sold off the mortgages it held to private institutions. Those sales deprived the fund of continuing revenues and provided only a one-time injection of $1.6 billion,1 and show the extent to which privatization robs governments of ongoing cash: investments in AGT and Alberta Mortgage Corporation were worth a total of $4.37 billion in 1988.2
Alberta did not make a single deposit to the Heritage Fund between 1987 and 2005. Through the 1990s, all yearly income from our initial investments was spent. Over that time, Alberta lost $7 billion to inflation alone.
The Calgary Chamber of Commerce calculates that had Alberta continued to save 30 per cent of resource revenues in the Heritage Fund, it would now be worth $128 billion.
A Political Consensus on Saving
It's rare that the Parkland Institute, the Calgary Chamber of Commerce, the Alberta NDP and Preston Manning all share the view that Alberta should be saving more of its natural-resource revenues.
Conservatives began championing a more robust approach to saving in the early 2000s. Business elites who fund organizations like the Canada West Foundation and the Canadian Taxpayers' Federation have a range of motivations for supporting increased savings.
First, when Alberta was posting massive surpluses, there was a palpable fear that Ottawa and other provinces would increase Alberta's equalization payments - raising the federal government and the "Rest of Canada" as a bogeyman preying on Albertans' wealth. Regardless of the validity of these fears, they remain a powerful motivator in Albertan public policy.
Furthermore, there are valid arguments to be made that Alberta's responsibility to fund a transition from a fossil-fuel-based energy economy to one more compatible with international legal obligations to address climate change should, in fact, involve fiscal transfers to the rest of Canada in some form, whether those transfers occur as part of an overall lending strategy, incubation funds for the private sector or publicly funded commercial ventures aimed at reducing greenhouse gas emissions, or outright transfers to the federal government.
Second, a savings strategy is seen by business elites and their think tanks as a way to keep a lid on Albertans' expectation of high-quality public services. Couched in terms of "curbing spending," establishing "firm fiscal rules" and "discipline," the Heritage Fund is positioned by commentators like Preston Manning or the Canadian Taxpayers Federation as a way to further a political agenda - preventing democratic demands for adequate funding for health care, social services, child care, or other government programs that Albertans can legitimately afford.
A Heritage Fund savings strategy like the one proposed by the Chamber of Commerce - that we put away 30 per cent of our non-renewable resource revenues - would mean throwing health care, education, and social services into total disarray. If, as they argue, we kept all other taxes and revenues the same, we would deprive our public-sector programs of $2.19 billion in 2010 - about eight per cent of our provincial program spending.
Even more radically, the Canadian Taxpayers' Federation recommends Alberta ramp up its savings program to encompass all non-renewable resources, forecast at $7 billion in 2010, or a quarter of provincial program spending - that's all of our spending on education, children's services, and seniors. Imagine the impact of 25-per-cent cuts across the provincial government - each and every year. For context, the worst of the Klein cuts in 1993-94 was a one-time across-the-board cut of 20 per cent, followed by almost immediate reinvestment.
Progressive think tanks like the Parkland Institute, however, favour saving resource-royalty revenue because of its very nature - resource revenues are finite and must be used to build a different kind of economy. Given that royalties are a rent we charge companies for the use of our declining fossil fuel resources, most economists argue that governments should capture as much of that rent as possible.
Royalties are the rent paid for use of our natural assets, and once the oil, gas and coal are gone, the rents are gone. It makes sense, then, that resource-royalty rent for our declining assets should be converted into some other kind of asset - converting natural capital into financial investments, such as green infrastructure and renewable energy industries. This is the wisest, most prudent and most practical use of our oil and gas wealth.
Revenue Reform: There has to be something to save
Household analogies only take us so far in understanding government finances. The parallels fall down when we consider that no ordinary person dictates their salary, benefits or pension. Ordinary people can't decide what we get paid, who pays us or the interest rates on our loans. Our investments are not large enough to influence the direction of the economy. If we don't like our jobs, we don't have the capacity to build a new industry from scratch in order to hire ourselves for a job we might like better. But governments have varying degrees of control over all of these aspects of their finances.
This is where a savings strategy is deeply intertwined with the broader question of taxes, royalties and other revenues in Alberta. Business elites are right to point out that we should be saving more of our royalty revenue - this is the wisest and most prudent way to make sure our current wealth benefits future generations. We can use public policy to ensure we have a different kind of economy in place when the world has moved on from fossil fuels.
But Alberta has had to use the vast majority of our royalty revenues for program spending, rather than saving or planning for a greener future, because we are not capturing enough revenue from taxes. Furthermore, because we leave so much royalty revenue on the table, we are allowing our natural assets to vaporize into the thin air of profits for large oil and gas companies - and a great deal of those profits is repatriated beyond Alberta's borders.
What the Heritage Fund Could Do
With royalty and tax reform, we would not need to raid the Heritage Fund of its annual growth for general program spending. If oil and gas royalties were to increase to fair and reasonable levels, we could legitimately save 30 per cent - or more - of our royalty revenues without starving public programs. As we've seen, we could make up some of that revenue today with tax reform, let alone the billions left on the table in non-renewable resource revenues.
Within a reformed revenue strategy, Alberta could take a hard look at what the Heritage Fund was originally intended to do and update those expectations to reflect 21st-century values and priorities.
For example, the Heritage Fund should be the primary vehicle for building a sustainable, green economy. Because its revenues are directly derived from our oil and gas wealth, we should be using the fund for the eventual and inevitable time when fossil fuels are no longer the energy source of choice for the majority of the world's population. The resource bounty we all enjoy now is a privilege, but also implies great responsibilities to the environment and future generations in the context of climate change.
The Heritage Fund could be used to finance the growth of a green energy sector in Alberta and across the country. The Fund could be used as a revolving, no-interest source of cash for municipalities and other non-profit entities to invest in green infrastructure in ways they cannot afford to do right now.
The Heritage Fund could be used to start an Albertan-owned public Crown Corporation focused on green energy, or could also be used to invest in projects that are only marginally economical now but show great promise in the future, such as rail links between major cities or between cities and suburbs.
It could be used on a low-interest basis by the private sector and even by other provinces to build green energy infrastructure, including research and development, grid upgrades and even venture capital. None of this is wild, radical or impossible - it could begin to happen tomorrow, as long as we are also prepared to have a grown-up conversation about taxes, royalties, and what kind of legacy we want to leave to future generations of Albertans.
1 Brett Gardner, "Alberta's Money Jars: Current Provincial Savings and Endowment Funds," Alberta's Energy Legacy (Canada West Foundation, 2007), 9-25.
2 Glen Mumey and Joseph Osterman, "Alberta Heritage Fund: Measuring Value and Achievement," Canadian Public Policy XVI (1), p. 29-50, 1990.
| WHAT ALBERTA SAVES HERITAGE FUND 2010 Equity Forecast: $13.8 billion Policy and Purpose: There is no legal requirement for the government of Alberta to make regular deposits into the Heritage Fund, or any requirement that a certain percentage of non-renewable resource revenues be saved. In fact, the law governing the fund requires that all investment income from the Heritage Fund be transferred to general revenue except the amount required to guard against inflation. SUSTAINABILITY FUND 2010 Estimate: $14.9 billion Policy and Purpose: When commodity prices are high, a portion of resource revenues are required, by law, to go to the Sustainability Fund. For example, in 2006-07, any resource revenues over $5.3 billion - that were not deposited into the Capital Account or other endowment funds - were required to go to the Sustainability Fund. The Sustainability Fund is not a savings fund. It is an account within the government's General Revenue. Its purpose is to smooth out the effects of short-term dips in commodity prices, fund emergency or disaster response, or natural gas rebates. ENDOWMENT FUNDS: 2010 FORECAST Alberta Heritage Foundation for Medical Research - $1.257 billion Alberta Heritage Science and Engineering Research - $714 million Alberta Heritage Scholarship - $695 million Alberta Cancer Prevention Legacy Fund - $101 million Alberta Energy Innovation Fund - $200 million Alberta's net assets forecast for 2010: $47.99 billion Source: Government of Alberta Budget 2010: Striking the Right Balance, Fiscal Plan Tables, p. 80 NORWAY'S GOVERNMENT PENSION FUND - GLOBAL All of Norway's oil and gas royalty revenue and all net profits from Norway's state-owned oil and gas firm, Statoil, are invested in the Government Pension Fund - Global. Norway did not begin saving resource revenues until 1996. Just 14 years later, the value of the Government Pension Fund - Global is valued at US$512 billion. It is the largest stock holder in Europe and the second largest sovereign wealth fund in the world, after the Abu Dhabi Investment Authority. |
