The governing sa国际传媒 Liberals recently announced in the throne speech the creation of a sa国际传媒 Prosperity Fund similar in concept to Alberta鈥檚 heritage trust fund.
sa国际传媒鈥檚 fund is meant to capitalize on future opportunities from natural-gas development. If done correctly, the Prosperity Fund could be a huge benefit to current and future British Columbians.
As with many things, though, the devil is in the details.
Thankfully there are lessons to be learned, and avoided, from our neighbours. Specifically, Alberta provides stark lessons on what not to do when establishing such a fund, while our other neighbour, Alaska, provides a positive lesson.
The first and most important lesson is that the rules of the fund will to a large degree determine its success.
With respect to contribution requirements, Alberta has none. Contributions are completely at the discretion of the current government.
Unfortunately for Albertans, the government has unwisely used this discretion. For example, it has made no resource-related deposits into the fund since 1987.
In contrast, Alaska has a constitutional requirement to deposit at least 25 per cent of specified non-renewable resource revenues into the fund. The state government increased that requirement, albeit legislatively, to 50 per cent of revenues from new oil and gas fields.
A key lesson for sa国际传媒 in establishing the Prosperity Fund is to remove or at least limit the discretion of the provincial legislature with respect to contributing to the fund from designated resource revenues. More specifically, the legislation for the fund should specify the contribution rates for royalty income as well as leases, and any other revenues directly linked to non-renewable resource extraction.
A second difference between Alberta and Alaska that is arguably more important than the contribution rate is how earnings of the fund can be used.
Alberta鈥檚 fund provides the province with almost complete discretion on how the fund鈥檚 earnings can be used, which explains why since its inception almost all of the earnings have been removed from the fund and transferred to the government to finance spending.
Since 1977, when the fund was created, it has earned a net income of $31.3 billion, but the government has withdrawn $29.6聽billion (95 per cent of the earnings) to support spending. It鈥檚 worth noting that over the same period, less than one per cent of Alaska鈥檚 Permanent Fund earnings (cumulative) have been transferred to the government to finance spending.
This is the key reason the value of the Alberta heritage fund is comparatively low. In 1988, when it ceased making contributions from resource revenues, the fund鈥檚 value stood at $12.6聽billion. As of 2011, 23聽years later, the fund鈥檚 value was $14.2 billion.
Alaska, on the other hand, specifically requires a sufficient amount of fund earnings to be retained to protect against inflation. Since its inception, also in 1977, Alaska鈥檚 Permanent Fund has retained 31 per cent of its earnings to protect against inflation. This in part explains the much higher value of Alaska鈥檚 fund ($40.1 billion as of 2011).
Another key difference is how the fund benefits citizens.
In Alberta, citizens benefit indirectly because the fund provides revenues to the province to support spending. (It is debatable whether the spending itself has actually benefited Albertans). In Alaska, however, citizens benefit directly via dividend payments from the fund. Each year, eligible Alaskans receive a direct payment from the permanent fund based on the five-year average earnings of the fund. These payments cannot reduce the principal or the earnings retained to protect against inflation.
Since the fund began, the Alaska Permanent Fund has distributed dividends totalling $19.2 billion or 46聽per cent of the fund鈥檚 total earnings. In 2011, it meant an average payment of roughly $1,000 US per eligible citizen.
If sa国际传媒鈥檚 Prosperity Fund were to consider such payments, it should only be implemented after the fund has eliminated the province鈥檚 substantial debt.
The key to the success of the Prosperity Fund, however, is inextricably linked with its rules. Alaska and Alberta provide stark performance differences over time, based almost exclusively on widely differing rules. Getting the rules right for sa国际传媒鈥檚 Prosperity Fund could establish the foundation for enormous benefits for both current and future British Columbians.
Jason Clemens is co-author of the soon-to-be-released Reforming Alberta鈥檚 Heritage Fund: Lessons from Alaska and Norway (available at fraserinstitute.org) and Niels Veldhuis is president of the Fraser Institute.
