Credit Union and Cooperative Patronage Refunds - Filene ...

Badgerland, all of this association’s equity is unallocated except for
approximately $8.0M of common stock. Its net income has nearly
doubled in the last five years.
This association is stronger than either Badgerland or AgGeorgia. At
its 2009 fiscal year end, its core surplus ratio was under 14%, and it
grew stronger in 2010 when the ratio reached 16%. Obviously this
association—which we agreed to leave unnamed—is in a position
to pay a patronage refund if the board approves it. The association’s
chief financial officer summarized the debate as follows.
Those Arguing “No Patronage Refund”
A portion of this association’s board of directors takes the position
that it operates on a cooperative basis every day even though the
association does not pay a patronage refund. These directors say that
the very existence of the association acts as a competitive force to
keep other lending institutions’ rates comparable to the association’s
rates and cost of services. That being true, these directors are not
in favor of paying a patronage refund. Members, they would argue,
already receive a patronage refund.
These directors also contend that it is unnecessary to charge higher
interest rates or prices for services only to return some of those earnings
in cash as a patronage refund. Obviously the association’s growth
is strong and it appears unnecessary to prime it further. In fact, no
one on the board of directors takes the view that a patronage refund
would improve the association’s rate of growth.
Those Arguing “Pay a Patronage Refund”
On the other side is a portion of directors who are in favor of paying
a patronage refund. These directors’ position is that co-ops are
supposed to pay a patronage refund. These directors also believe
that paying a patronage refund ties members more closely with, and
deepens their loyalty to, the association.
If Paid, Pay Patronage Refund in Cash; No Allocated
Equity
If there is a consensus within the board of directors, it is that a
patronage refund, if paid, should be entirely cash. All of the directors
are farmers and hence very familiar with agricultural cooperatives.
These directors do not like the idea of receiving an allocation of
patronage refunds but not receiving a large enough cash patronage
refund to pay the income taxes those members will owe state and
federal governments on that patronage income. 30
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