Jul 18 2011

Credit Union and Cooperative Patronage Refunds

Report  
Number  
242

Patronage refunds are a unique tool credit unions and other cooperatives can use to manage capital levels, return value to member- shareholders, and tie members more closely to the company.

Joel Dahlgren, JD
Black Dog Co-op Law
Dan Kitzberger
Kitzberger Consulting
Report Number 242

Executive Summary

Credit Union and Cooperative Patronage Refunds discusses the use of patronage refunds by credit unions. A patronage refund is an amount returned to a cooperative’s members at the end of an accounting period, usually a year. It is paid to members on the basis of how much they used the cooperative. More use means a bigger refund; less use means a smaller one.

What is the research about?

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.

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.