COMMENTARY: Alberta Government Should Create Stricter Rules for Heritage Fund to Ensure Annual Deposits from Oil & Gas Royalties

Earlier this year, the Smith government released its plan to grow the Heritage Fund—Alberta’s long-term resource revenue (e.g. oil and gas royalties) savings fund—to $250 billion or more by 2050. But due to the government’s own rules, which are easily broken, absent a change in approach, that promise will be hard to keep.

For example, according to the government’s current rules, if it records a budget surplus in any given year, it must use at least 50 per cent of that surplus to repay debt or invest in the Heritage Fund. This commitment, paired with a plan to reinvest any Heritage Fund investment returns back into the fund, is the main way the government plans to build up the fund.

Over the past four years, the Smith government has recorded budget surpluses, fuelled by relatively high resource revenue, and deposited $753 million in the Heritage Fund in 2023 and $2.0 billion in 2024.

But Alberta’s fiscal fortunes have changed. The Smith government now projects budget deficits from 2025/26 to 2027/28. That means that, according to current rules, the government is no longer required to deposit money into the Heritage Fund, even though it’s just as important to continue deposits during times of deficits. And while the government must still reinvest investment returns into the fund during periods of deficits, it could easily break this rule.

That’s the problem with relatively weak rules—they either don’t apply or are ignored when times get tough. Indeed, in 1976/77 when the Lougheed government created the Heritage Fund, it required that 30 per cent of resource revenue be deposited in the fund each year. If the government had stuck to this rule, it could have grown a sizeable Heritage Fund over time. But the 30 per cent contribution rate rule was “statutory,” which meant that the government could unilaterally change the rule when times got tough, and it did.

Following an oil price collapse in 1982/83, the government reduced Heritage Fund contributions to 15 per cent of resource revenue. Following a second oil price collapse in 1986/87, and budget deficits, the government ended resource revenue contributions entirely. Consequently, the government has deposited less than four per cent of Alberta’s total resource revenue in the Heritage Fund over its lifetime. And despite the fund existing for more than 50 years, it’s worth about $25 billion today—a far cry from the Smith government’s $250 billion goal.

Fortunately, there’s a way to ensure Premier Smith’s rules for the fund remain effective over time—make them constitutional, not statutory.

To create constitutional rules, the Alberta government would first seek consent from Albertans through a referendum—a procedure that in itself provides value by educating Albertans on the benefits of stricter rules for the Heritage Fund. Assuming the proposal receives the necessary level of public support, the Alberta government would then pass legislation to recognize the rules and present this legislation to the federal House of Commons and Senate for recognition, resulting in a change pertaining to Alberta in Canada’s Constitution.

As a result, if the Smith government, or any future Alberta government, wanted to reverse the rules or ignore their requirements, it would need to reverse each step in this process—seek approval from Albertans via a referendum, pass provincial legislation, and ask the federal government to approve similar legislation. In other words, it would be much more work to change or ignore Heritage Fund rules—unlike today, when the provincial government can unilaterally change the rules without the approval of Albertans or support from the federal government.

The Smith government has promised to grow the Heritage Fund, which is a worthy objective. But it must stick to its commitment—even when times are tough. Put simply, to grow the Heritage Fund over the long-term, Albertans needs constitutional rules.