Credit Union and Cooperative Patronage Refunds - Filene ...

Figure 4: Present Value of Patronage Distributions
Badgerland AgGeorgia
1. Patronage distribution allocated to members $1.00 $5.00
2. Allocated equity $0.00 $3.35
3. Cash portion paid by co-op $1.00 $1.65
4. Member taxes paid $(0.35) $(1.75)
5. Member net cash position year 1 $0.65 $(0.10)
6. Present value of redeemed equity at 5% cost of capital $0.00 $2.26
over 8 years
7. Member net cash position after redemption of equity
year 8
$0.65 $2.16
provide their members—again,
agricultural producers—with
short-term credit for crop and
livestock enterprises and for
purchases of farm machinery.
By 1968, all government capital
was repaid.
Originally, the system’s associations
were operated separately
from one another, but in the
late 1980s they were consolidated
under the same management
structures into ACAs. Each ACA has at least two subsidiary
lending institutions: a Federal Land Credit Association (Land Bank)
and a Production Credit Association (Credit Association).
Federal Land Banks were—and inside of an ACA, still are—exempt
from income tax under 501(c)(1) because they are federally chartered
organizations. Production Credit Associations are nonexempt
cooperatives under Subchapter T. From the provision for income tax
in the audits of AgGeorgia and Badgerland, respectively, approximately
60% of these ACAs’ income is generated by their Land Banks
(tax exempt) and 40% of their income is generated by their Credit
Associations (nonexempt under Subchapter T).
Later in this chapter, we also discuss a third ACA. However, the
officers of this ACA requested that we not disclose their names or
the identity of the ACA, because the board of directors and senior
management are engaged in an ongoing discussion about whether
the ACA will pay patronage refunds. The chief financial officer we
spoke with is concerned that identifying the ACA might diminish
the openness of the deliberations currently under way and/or suggest
that senior management is biased either for or against the payment of
patronage refunds.
FCA—Regulatory Agency of ACAs
The FCA regulates AgGeorgia, Badgerland, and the other 79 ACAs,
and it establishes capital adequacy ratios for these associations.
Figure 5 contains the 2009 ratios for AgGeorgia and Badgerland,
the FCA minimum ratio, and the ratios for the combined 81 ACAs
as of December 31, 2010. Capital ratios are also provided for the
unnamed ACA that we will discuss later in this chapter.
FCA regulations prohibit the inclusion of more than two percentage
points of allocated equities in the calculation of the core surplus
ratio. 28 Further, the regulations also prohibit in the calculation of
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