Credit Union and Cooperative Patronage Refunds - Filene ...

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Executive Summary and Commentary By Ben Rogers, Research Director Last year, I overestimated my tax liability and thrilled myself (and my wife) with a refund. When I use my credit union credit card, I get a monthly 1% cash-back reward. On a different card, I earn airline miles that I use to fly my family home for Christmas. With my REI (Recreational Equipment, Inc.) membership, I get back 10% of every dollar I spend at the end of each year. Each of these cases demonstrates one part, and sometimes both parts, of a powerful two-pronged formula: an incentive based on my use of a product, and the psychic gratification of windfall money. Credit Union and Cooperative Patronage Refunds seeks to illuminate patronage refunds, a unique tool credit unions and other cooperatives can use to manage capital levels, return value to membershareholders, and tie members more closely to the company. The report examines the details of common refund practices outside the credit union system and weighs the pros and cons of increasing the practice among credit unions. What Did the Researchers Find? Use rather than ownership is the traditional driver of value at a cooperative. Using cooperative theory, the authors argue that credit unions should consider patronage dividends as a long-term commitment to users. The difference between a cooperative (like a credit union) and an investor- owned firm shines through in how well the cooperative rewards members who contribute to its ongoing success. The report profiles three refund- paying credit unions as well as several non–credit union cooperatives. Each treats its patronage dividend differently, but some similarities emerge: By issuing regular refunds, leaders go beyond rhetoric in considering members as the owners of the credit union’s capital; members appreciate the periodic windfall (one study indicates that agricultural co-op members prefer it to superior prices or interest rates); and credit unions that regularly pay refunds must be financially disciplined to support a regular payout. Finally, the researchers explore patronage refunds as a tax management strategy. By paying out refunds as cash and as allocated equity held at the cooperative in the name of members, certain cooperatives—including grocers, agricultural lenders, and rural electric companies—minimize their corporate tax burden. vii
What Are the Credit Union Implications? Credit unions, of course, pay member dividends every month in the form of ordinary interest. Very few, however, offer a consistent extraordinary dividend. Standard reasons for not paying one include the following: Earnings are already tight, so it’s unaffordable; paying an extraordinary dividend once could lead members to expect one every year and be frustrated without one; and any potential excess is already reflected in the credit union’s attractive savings and loan rates. These reasons are all valid, but they are the same reasons any publicly traded firm with excess capital might use. Nevertheless, the boards of those publicly traded companies constantly remind themselves that their shareholders expect real value and can easily take their money elsewhere. Nothing—not good feelings, not good intentions—says “please stay” like cash. Credit unions considering a patronage refund should take steps to: • Encourage an honest governance and management discussion over not just the marketing value of a patronage dividend but the cooperative imperative to return unused capital to members. • Balance the benefits of any refund between saving members and borrowing members, both of whom are essential to the credit union’s health. • Help set realistic member expectations for future payments and teach members how to earn a bigger refund in the future. Back to the REI example above. Like credit unions, this outdoor supplier cooperative operates a modern company selling familiar products in an intensely competitive retail industry. Surely its leadership knows that it could plow its yearly member dividend funds back into the business by lowering prices 10% across the board. Doing so might even goose short-term sales. But REI has made a calculated, long-term choice to compete daily with other retailers on price. Then the company writes its member- users a yearly reminder of its tangible cooperative value—in the form of a patronage check. viii
Page 1 and 2: Credit Union and Cooperative Patron
Page 3 and 4: Copyright © 2011 by Filene Researc
Page 5 and 6: Acknowledgments We appreciate and a
Page 7: List of Figures 1. Average of 27 Cr
Page 11 and 12: Introduction There are many ways in
Page 13 and 14: to us is a philosophical gulf betwe
Page 15 and 16: CHAPTER 1 Patronage Refunds Are Mor
Page 17 and 18: activities with their credit union
Page 19 and 20: members standing on the basis of ow
Page 21 and 22: epayment, and/or if the asset is on
Page 23 and 24: If the co-op’s earnings are not d
Page 25 and 26: principles. When we discuss other c
Page 27 and 28: A recent post to the Filene Researc
Page 29 and 30: Our response to the blog post quest
Page 31 and 32: The subject of this chapter is a th
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Page 35 and 36: Figure 2: Contrast Statutes Governi
Page 37 and 38: Patronage earnings that are allocat
Page 39 and 40: When rural electric cooperatives ar
Page 41 and 42: CHAPTER 5 Use of Patronage Refunds
Page 43 and 44: Figure 4: Present Value of Patronag
Page 45 and 46: y row 9). All in all, this is a ver
Page 47 and 48: Badgerland, all of this association
Page 49 and 50: AgGeorgia’s members probably expe
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Page 53 and 54: The capital accumulated through ear
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Patronage Refunds: A Differentiator
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Figure 6: Potential Tax Effects of
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ather than later, particularly if t
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of the cooperative were deducting t
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Patronage Refunds and Capital M ana
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Appendix Exhibit A: 2007 Newsletter
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Due to careful planning and prudent
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Think of how much more you, and oth
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contrast, the 27 credit unions paid
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to redemptions. Think Diamond Walnu
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