Credit Union and Cooperative Patronage Refunds - Filene ...

to us is a philosophical gulf between IOFs and co-ops. We assume
that if you are affiliated with a credit union, this philosophical
distinction drives your business model forward because credit unions
are cooperatives too.
To be clear, this report is not about the virtues of a collective society
as opposed to a society organized around capitalism. Cooperatives—
including credit unions—are the ultimate self-help business organization,
3 and hence they are part of a capitalist system that allocates
money and wealth across the economy through profits and losses.
But cooperatives reward users rather than owners through patronage
refunds distributed to the cooperative’s members on the basis of
patronage (i.e., use). IOFs do not.
Failing to pay a patronage refund is not an existential threat to a
cooperative. As few as 27 credit unions out of more than 7,000 in
the Callahan report regularly paid an annual patronage refund in
each of the last five years. Later in this report we discuss the unresolved
debate about whether to pay patronage refunds, a debate that
is occurring within the board of directors and management of a farm
credit association that is a member of the cooperatively owned Farm
Credit System. Paying patronage refunds is far more accepted and
perhaps even expected for a farm credit association. Thus it will be
obvious that the question of whether to pay a patronage refund is not
an issue limited to credit unions.
We note, however, that Callahan’s study of the 27 credit unions that
paid patronage refunds documented that business growth, member
involvement, and return on assets were all stronger for these 27 than
for the other credit unions. It is very difficult to argue against the
positive impact of paying a patronage refund. Our own experience
with cooperatives paying a patronage refund is positive and entirely
consistent with this conclusion.
The balance of this report will discuss patronage refunds from several
viewpoints. First, we drill down further to explore how patronage
refunds are more than just a rebate, how they relate to capitalization,
and how they are influenced by the principles of subordination of
capital, service at cost, and co-op agency theory. These principles
sum up the philosophical gulf that separates cooperatives and IOFs,
and they drive the distribution of earnings to members and patrons
rather than to investors.
Second, we address the question of why cooperatives—and credit
unions—need to be financially successful and generate earnings.
Third, we discuss patronage refunds in the abstract, without the
application of tax, and then we discuss four tax regimes as applied to
alternative types of open membership cooperatives.
4