In 1987, the value of Alberta’s Heritage Savings and Trust Fund stood at $12.7 billion. That year, the province faced a massive budget deficit and transfers to the fund from resource revenues were suspended. Such deposits did not resume again until almost two decades later and only lasted two years before being suspended again.

There is little doubt of the severity of the financial difficulties facing Alberta. In many ways it’s the late 1980s all over again. Alberta has again squandered a period of pronounced prosperity and ended up with unsustainable deficits, the likelihood of mounting debt, and no savings. While reform and reduction of spending will have to be undertaken in the short term to achieve a balanced budget, the province should not forget or ignore the need for longer term reform.

One area in need of real reform over the longer term is the Heritage Fund. Its current mission is to “provide prudent stewardship of the savings from Alberta’s non-renewable resources by providing the greatest financial returns on those savings for current and future generations of Albertans.”

It’s hard to imagine any evaluation of government policy towards the Heritage Fund concluding anything other than that it’s been a failure. Consider how little the government has saved from non-renewable resource revenues. Since the Fund’s inception, the province has deposited just 5.4 per cent of all resource revenues.

Even more distressing is that Alberta has used almost all of the earnings of the fund to finance current operations. Between 1977 and 2011, the Heritage Fund’s cumulative net income was $31.3 billion. During the same period, the amount transferred out of the fund to the government was $29.6 billion. Such withdrawals meant that the government has failed to protect the fund’s principal assets against inflation.

A change in rules about the Heritage Fund is key and an important lesson comes from our Alaskan neighbours. Alaska’s Permanent Fund was established the same year as Alberta’s Heritage Fund except that its balance stood at $40.1 billion as of 2011. That was more than two-and-a-half times that of the Heritage Fund ($14.2 billion in 2011).

The reason for this stark difference is firmly rooted in the rules of the two funds. In contrast to the discretion enjoyed by Alberta politicians, Alaskan voters imposed a constitutional requirement that the state deposit at least 25 per cent of specified non-renewable resource revenues into the fund. (The state later passed statutory requirements that raised the contribution rate on new oil and gas fields to 50 per cent.)

In addition, the earnings of the Alaska Fund have generally been out of reach of the state government. Since inception, transfers to the Alaska government from the Permanent Fund have been a mere $424 million, or one per cent of total earnings. Almost one-third of earnings—$12.9 billion or 31 per cent—have been retained within the fund to ensure inflation-proofing of the fund’s principal.

Finally, Alaska’s Permanent Fund has a dividend program for eligible residents, which has created a strong political constraint on how politicians can use the fund. Since its inception, $19.2 billion (46 per cent of total earnings) has been disbursed to Alaskans. Such dividends give Alaskans a genuine stake in the fund’s future.

Imagine how Alberta’s Heritage Fund would look if it had implemented rules similar to Alaska’s. Assume for example, that in 1995 when the provincial government announced a balanced budget, it also implemented Alaska-like rules for contributions to the Heritage Fund. Between 1995 and 2011, that would have meant contributions of $31.8 billion instead of the actual contributions of $3.9 billion.

Not only would the Heritage Fund balance have increased markedly but such rules would also have constrained the growth in provincial spending, which has led to the current deficit. In short, the value of Alberta’s Heritage Fund would be vastly higher had the legislature imposed Alaska-type rules. In doing so, the province would have created a working mechanism to protect the resource revenue inheritance for future generations while simultaneously ensuring that Alberta governments live within their means today. The province should think ahead now in order to avoid the same mistake a third time in the history of the Heritage Fund.