N.W.T. Heritage Fund not keeping up with inflation, gov't borrows money to feed it

Five years into the N.W.T. Heritage Fund, the balance is sitting at $17.1 million and doesn't appear to be keeping up with inflation.

Fund sees returns of 1.05% in last fiscal year, leading to estimated drop in value of $50,000

Finance Minister Robert C. McLeod, left, speaks during a recent sitting of the N.W.T. Legislature. A committee of cabinet members is responsible for managing the N.W.T. Heritage Fund. It's not clear which ministers are on the board. Pictured with McLeod are Industry Minister Wally Schumann and Justice Minister Louis Sebert. (Mario De Ciccio/Radio-Canada)

Five years into the Northwest Territories Heritage Fund, the balance is sitting at $17.1 million and doesn't appear to be keeping up with inflation.

On top of that, the Department of Finance has borrowed money to feed the fund. On Feb. 24, 2016, Finance Minister Robert C. McLeod told the Legislative Assembly that the previous government had committed 25 per cent of the territory's resource revenues to the fund.

"Because the N.W.T. has been in a cash deficit program for the last number of years, the GNWT has had to incur short-term borrowing costs to meet this obligation," he said.

"Since the start of the fund in 2012-2013, we have paid over $41,000 in interest costs related to these payments."

Those returns are pitiful.- Kieron Testart, MLA Kam Lake 

When asked about the circumstances under which the territorial government took out a short-term loan to feed the fund, Finance spokesperson Todd Sasaki said the government "does not directly borrow to add to the fund."

The N.W.T. Heritage Fund is a pot of money set aside from the territory's mine royalties. It's one of many sovereign wealth funds that exist across the world. Norway's sovereign wealth fund has made headlines for exceeding $1 trillion.

Kam Lake MLA Kieron Testart said MLAs have asked questions about the loan, and the answer came down to misaligned projections about how much royalty money was coming in.

"We're not talking about a private business," he said.

"It's all based on projections and sometimes those projections are off … in that case the projections were off and they needed to [take out a loan] — but you really can't … that defeats the purpose of a fund that's developing wealth for the Northwest Territories."

The cost of not keeping up with inflation

This graphic shows how a 1.05 per cent interest rate would affect the more than $10.6 million reported in the account for the 2016-17 fiscal year, assuming the full amount sat in the account the entire year. (CBC graphic)

In an email, Sasaki said the fund is invested in accordance with government regulations, which allow for low-risk investments, including government and bank bonds, and short-term investments.

Financial statements from 2016-17 state the heritage fund's single objective is to "maximize long-term growth" of the money in the fund while "avoiding undue risk."

The money is managed by the Financial Management Board, which is made up of a committee of cabinet members.

In the 2016-17 fiscal year, the fund yielded a return of 1.05 per cent. That's compared to an average inflation rate for that fiscal year of 1.525 per cent.

That means if the more than $10.6 million reported for that year sat in the account for the entire fiscal year, it would have decreased in value by 0.45 per cent, or $50,000.

That's compared to Norway's sovereign wealth fund, which is considered to be the gold standard for accounts like these, especially by many N.W.T. politicians. Testart, Frame Lake MLA Kevin O'Reilly, Yellowknife North MLA Cory Vanthuyne and former finance minister Michael Miltenberger have all pointed to that fund in recent interviews.

Norway's sovereign wealth sees 4% return

'If there is no willingness to change the fund, they should shut it down and use that money for infrastructure projects like they are using the rest of the resource revenues for,' says Kieron Testart. (Alex Brockman/CBC)

In December 2017, Bloomberg made an example of Norway's investments in an article titled How Not to Run a Sovereign Wealth Fund. It criticized the government of Norway for averaging only a 4.06 per cent return since the fund was created in 1996, taking into account inflation.

Testart said he has no interest in micro-managing the way the funds are invested, but criticized the N.W.T.'s rate of return.

"Those returns are pitiful," he said. "If there is no willingness to change the fund, they should shut it down and use that money for infrastructure projects like they are using the rest of the resource revenues for."

Maybe it is less risky to simply keep it in a savings account.- MLA Cory Vanthuyne

In an interview with CBC News, O'Reilly said the low rate of return indicates it's time to review the fund.

"If we are not meeting the Consumer Price Index figures — which seems to be the case — then it's time to look at those investment policies and change them," he said.

MLA Vanthuyne is less concerned about the issue. He said until there is more money in the fund to allow for more opportunity to diversify investments, it's not wise to take financial risks. 

"Small jurisdictions like ours with a much smaller pot, I'm not sure if it would be prudent for us at this point in time to make riskier investments," he said. "Maybe it is less risky to simply keep it in a savings account."

Vanthuyne said he doesn't know where the money is invested.

Finance Minister McLeod was unavailable for an interview.


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