Credit Union and Cooperative Patronage Refunds - Filene ...

activities with their credit union to the equity retained from each
member’s activities or the income generated from each member’s
activities. Pure co-op theory 5 takes issue with this approach, because
if all earnings belong to members, then all earnings should be
distributed either with cash or with allocated equity. Hence, all or
substantially all of a co-op’s patronage earnings should be distributed
to members on a patronage basis. There should be an observable link
between each member’s use and the member’s capitalization of the
co-op.
This credit union deviation from co-op allocated equity principles
of retaining earnings as undivided equity capital is more dramatic in
a theoretic sense than it is in a practical sense. The following comparisons
of credit unions with agricultural credit associations (ACAs)
illustrate that even though credit unions do not distribute their
earnings with allocated equity or undertake to eventually redeem that
equity, credit unions are quite similar in this respect (and others) to
ACAs, which have been functioning as co-op financial institutions
since as early as 1916.
The Farm Credit System includes 81 ACAs across the country that
provide short- and long-term financing to agricultural producers
(farmers). ACAs operate on a cooperative basis, as does the entire
Farm Credit System. Whereas in a credit union the members hold
the voting control and are eligible to serve on the board of directors,
in an ACA, the farmers are the voting members and are elected to
serve on the board of directors.
The 27 credit unions in the Callahan study distributed on average
23% of their earnings as a cash patronage refund, whereas the
81 ACAs paid 21.5% of their earnings as a cash patronage refund.
The ACAs retained $4.0M per year in allocated equity to capitalize
the ACA, amounting to 18% of their earnings (and redeemed $2.4M
per year on average during those years), while the credit unions did
not distribute any patronage refunds with allocated equity.
ACAs and credit unions each retain substantial portions of their
earnings (60% and 75%, respectively) as permanent unallocated
equity. Even for ACAs, this approach is not consistent with the co-op
Figure 1: Average of 27 Credit Unions Compared with Average of 81 ACAs
Average of 2008, 2009, and 2010 Credit unions % Total ACAs % Total
Cash patronage refund 822,800 23.34 4,836,948 21.56
Patronage refund in allocated equity — 0.00 4,028,708 17.96
Undivided/Unallocated earnings 2,703,149 76.66 13,192,951 58.81
Income tax on co-op’s earnings — 0.00 376,051 1.68
Total earnings (average per co-op) $3,525,949 100.00 $22,434,658 100.00
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