Credit Union and Cooperative Patronage Refunds - Filene ...

The subject of this chapter is a theoretical open membership cooperative.
The focus of this report, in fact, is directed at open membership
cooperatives. Open membership means there are no limitations
on the number of members who can join the cooperative or do
business with it. The allocated equity that members earn from doing
business with open membership cooperatives does not appreciate in
value. When allocated equity is redeemed, the co-op pays no more
than the face value of the allocated equity.
In contrast, the common stock in a closed membership cooperative
can appreciate in value if the cooperative is financially successful.
Closed membership cooperatives limit membership because the
co-op’s physical plant size is defined. An ethanol cooperative, for
example, produces a finite number of gallons of ethanol, and it needs
a finite number of bushels of corn to produce that ethanol. The
cooperative does not sell more stock or approve new members after
its membership is of sufficient size to produce and deliver enough
corn to supply the cooperative’s ethanol production capabilities.
We have already said that a cooperative’s earnings belong to members
rather than the co-op. Patronage refunds are distributed from the
co-op’s GAAP patronage- sourced income. Assuming that all earnings
are, in fact, generated from transactions with or for members,
then all of the co-op’s income is theoretically available to allocate to
members on a patronage basis.
Capitalization of the cooperative naturally occurs proportionate to
each member’s use of the cooperative. Earnings are distributed in
cash to the extent possible but are retained by the cooperative as allocated
equity to finance its need for equity capital. The cooperative’s
need for equity turns on its growth objectives, its plans to borrow
debt capital, and its desire to redeem equities allocated from previous
years’ earnings. The cooperative aims to generate enough earnings
and surplus cash flow to align ownership with use by redeeming the
allocated equity of former, retired, or deceased members.
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