Cooperatives in Your Community

Transcription

1 Cooperatives in Your Community Consumer Cooperatives

2 2014 Version Released: October 29, Second Street, NE Suite 205 Washington, DC (202) Phone (202) Fax

3 Cooperatives in Your Community A Curriculum for High School Students Authors: Barbara O Neill, Ph.D., CFP Distinguished Professor and Extension Specialist in Financial Resource Management Rutgers Cooperative Extension School of Environmental and Biological Sciences, Rutgers University New Brunswick, NJ This publication was made possible through funding provided by the Council of Food, Agricultural and Resource Economics (C-FARE) and funding provided to C-FARE by the CHS Foundation. The Council for Economic Education is a supporting partner and provided technical assistance with peer review and marketing of the lesson plans.

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5 Cooperatives in Your Community Lesson #1: Consumer Cooperatives LESSON DESCRIPTION (Background for the Instructor) In this lesson, the students will learn about the cooperative movement, how cooperatives (co-ops) operate, and examples of consumer cooperatives in various sectors of the U.S. economy (e.g., financial services, utilities, food, housing, child care, and health care). The lesson includes seven activities that instructors can select from where students will: 1. Read about co-ops and answer a series of questions about them, 2. Watch a video and answer questions about cooperatives, 3. Answer a series of True-False questions, 4. Compare the features of deposit accounts at two banks and a credit union, 5. Compare the cost of loans at two banks and a credit union, 6. Debrief a skit about co-ops, and 7. Research a consumer cooperative and make a presentation about it in class. INTRODUCTION (Background for the Instructor) A cooperative (co-op) is a special category of corporation (business) or organization that is owned and operated by its members (also known as userowners). Members become part of a co-op by purchasing a required minimum amount of shares (e.g., $25 to open a credit union share account). In the vast majority (around 95%) of cooperatives, each member has one vote (regardless of number of shares purchased) at the co-op s annual business meeting. A few cooperatives base voting rights on the amount of business volume that someone generates. Voting systems in cooperatives are quite different from those in investorowned firms where votes are based on the level of investment or amount of shares. The members of a co-op buy its products (e.g., food) or use its services (e.g., electricity) and share in profits generated by the co-op. The primary objective of a cooperative is to provide high quality products or services at the lowest net price to its members. Thus, co-ops exist to serve the needs of their memberowners. Increased operating efficiency is an important concern, however, to run a successful operation. Cooperatives must cover their operating costs to 1

6 remain viable business entities. While they are not organized to maximize profits for outside investors, they should not be confused with non-profit 501(c) (3) organizations whose primary purpose is to provide human services or to attain educational, social, or philanthropic goals. Co-ops operate according to a set of rules, called bylaws (as many organizations do), and are governed by an elected board of directors that is chosen from among the co-op membership. Thus, there are generally no outside directors as is the case with investor-owned corporations. Co-op boards hire management and staff to run a co-op s day-to-day operations. While cooperatives are widespread in the U.S. agricultural industry sector, the largest numbers of co-ops actually involve consumer products and services, particularly credit unions and electric co-ops. More than 100 million Americans, nearly one in three, belong to one or more cooperatives. While cooperatives have many unique advantages, they also have unique challenges. The users of a cooperative must be willing and able to invest in the firm. As in any democratic organization, there is the potential for conflict between members. Because the board of directors is elected from the membership, they have unique insights as customers. However, the board members may need to work to develop business and financial skills and to fully understand the industries in which the cooperative operates. CONCEPTS u Board of directors u Cooperatives u Credit unions u One member/one vote u Share accounts and share draft accounts OBJECTIVES Students will be able to: Explain how cooperatives work and how they differ from investor-owned firms. Identify the advantages and disadvantages of cooperatives as a business entity. Define the terminology of cooperatives (e.g., share, patronage refund). Describe five different types of consumer cooperatives with an example of each (e.g., credit union: ABC Federal Credit Union). 2

7 CONTENT STANDARDS Common Core State Standards for Math: The Consumer Cooperatives lesson supports the Common Core State Standards Initiative mathematics standards. Its content and learning activities link mathematics to everyday life decision-making (e.g., loan cost calculations and interest rate comparisons on deposit accounts). It also satisfies Common Core number and quantity requirements. Council for Economic Education National Standards for Financial Literacy Buying Goods and Services-Benchmark 1 Discuss how consumer decisions are affected by the price of a good or service and its alternatives and by a consumer s income and preferences. Financial well-being is improved by making informed spending decisions, which entails collecting information, planning, and budgeting. Saving-Benchmarks 2-3 Compare and contrast credit unions versus banks in explaining that interest is the price that a financial institution pays for using a depositor s money and it is determined by market forces and the cost of doing business. The higher an interest rate is, the more likely people are to deposit money and save and the less likely they are willing (and/or able) to borrow money and spend (e.g., interest rates charged for loans and credit cards). Saving-Benchmark 4 Explain credit unions in the context that, when savers earn a higher interest rate on their deposits, their savings will grow more quickly. Council for Economic Education Voluntary National Content Standards in Economics: voluntary-national-content-standards-2010.pdf. Content Standard 2 (Decision Making) This standard is relevant for this lesson: Effective decision making requires comparing the additional costs of alternatives with the additional benefits. An example would be comparing products available at credit unions, a type of cooperative business, with those available at commercial banks. Content Standard 3 (Allocation) This standard is relevant for this lesson: Different methods can be used to allocate goods and services. People acting individually or collectively must choose which methods to use to allocate different kinds of goods and services. 3

8 Content Standard 4 (Incentives) This standard is relevant for this lesson: People usually respond predictably to positive and negative incentives. To understand or predict behavior of people or organizations, students must understand the economic incentives that people or organizations face. Content Standard 9 (Competition and Marketing Structure) This standard is relevant for this lesson: Competition among sellers usually lowers costs and prices, and encourages producers to produce what consumers are willing and able to buy. Content Standard 10 (Institutions) This standard is also relevant and can be used for this lesson: Institutions evolve and are created to help individuals and groups accomplish their goals. Banks, labor unions, markets, corporations, legal systems, and not-for-profit organizations are examples of important institutions. Note that cooperatives could be included in the list of examples as another type of institution that students need to understand. Credit unions and other cooperatives are created to help individuals and groups accomplish their goals. 4

9 TIME REQUIRED 60 to 180 minutes (depending upon content depth and number of activities that are used) MATERIALS Slides 1.1 to 1.8 Cooperatives Quiz One copy of Activity 1.1 to 1.7 for each student Teachers are encouraged to use as many of the seven student learning activities as possible to provide a fuller understanding of consumer cooperatives. PROCEDURE An introductory activity to interest students would be to ask them how they think profits of an enterprise should be distributed. They are likely to decide that profits should be based on how much owners invest in an enterprise. Then ask what students think about having every investor provide the same level of investment and having profits distributed based on how much they purchased from the enterprise. Such an approach could help students open their thinking to alternative forms of institutions, which sets the stage and makes a nice segue to a discussion of cooperatives. It is important to note that the word profit (i.e., a surplus of income over expenses) should not necessarily be construed as a bad thing. Many people do not appreciate the role of risk-taking that is necessary to grow and maintain successful business enterprises. In addition, there are many benefits to society from allocating resources that are derived from profits. This discussion is merely meant to stimulate thinking about who benefits from profits: shareholders in investor-owned firms and members in businesses that are organized as cooperatives. 1. Distribute the Cooperatives Quiz as a pre-test to assess what students already know about cooperatives before teaching any curriculum content. 2. Explain to the students that they are going to learn about consumer cooperatives (co-ops). Co-ops are member-owned businesses or organizations that provide a product or service for their members. They come in a variety of sizes from small store front operations to large corporations. More than 100 million Americans (of about 318,000,000 in 2014) participate in co-ops, almost 1 in 3. Review slides 1.1 to

10 3. Tell the students that many commonly-used products and services can be purchased through a co-op including checking and savings accounts, telephone and electrical service, child care, housing, food, and health care. Yet, many people are unaware of this type of business enterprise. 4. Distribute a copy of Activity 1.1, Cooperative Facts and Discussion Questions. Organize the class into groups of no more than five members each. Working together, the students should read the handout and answer the questions at the end. Discuss the answers to the questions for discussion at the end of Activity 1.1. A. How do cooperatives work? Cooperatives are businesses or organizations that are owned and operated by members that purchase its goods (e.g., food) and services (e.g., utilities). People purchase shares to become co-op members and receive the right to vote on co-op business. Co-ops come in a variety of sizes and operate in a variety of industries. B. What is the primary objective of cooperatives? The primary objective of cooperatives is to provide a high quality product or service to its members at an affordable cost. The net cost for a product or service is the price minus the share of a cooperative s profits that a member receives (similar to a rebate). C. Why do some cooperatives, such as food co-ops and nursery school coops, ask or require members to volunteer time (labor)? Co-ops that require their members to provide a contribution of volunteer time, as well as money to purchase shares, are able to decrease their operational expenses. This lowers the cost of their product or service because they do not have to hire paid staff. Another benefit of member service is buy in. Co-op members may feel more invested in the co-op when they actually work there. D. Why do credit unions typically offer a higher interest rate on deposit accounts and a lower interest rate on loans than commercial banks? Credit unions exist solely to serve their member owners, not to pay high dividends to an outside group of investors. The goal is to provide a service rather than maximize a profit. Co-ops have to make a profit, or surplus, over time or they may not stay in business. However, they do not have a goal of maximizing profit. A credit union s profits are returned to members 6

11 and that is why credit unions can offer higher interest rates on deposits and lower rates on loans. E. Are there disadvantages to using credit unions? If so, what? Under federal and state laws, credit unions may only offer membership to individuals who have a particular affiliation relationship. The affiliation relationship, which is called the field of membership, is the commonality between credit union members. The affiliation relationship may involve an employer, school, church, homeowner s association group, or other organization. In addition, credit unions generally have fewer brick and mortar branch offices for face-to-face service than commercial banks do. This might not be a big disadvantage, however, for customers who primarily make financial transactions via direct deposit and online transactions. F. Why are most utility (e.g., electric and telephone) cooperatives in rural areas? Utility cooperatives (e.g., electric and telephone) were formed by citizens in rural communities with sparse populations because investor-owned utility companies would not provide service in those areas. Commercial companies did not want to incur the high cost of running wires to a relatively small number of homes. G. What are the similarities between mutual insurance companies and mutual savings banks? Both mutual insurance companies and mutual savings banks are financial services businesses that are organized as cooperatives. Thus, they are owned by their policyholders and depositors, respectively, and not by stockholders. Profits earned in excess of operating costs and reserves are returned to members. Costs for their products (e.g., insurance policies and savings accounts) are generally attractive, compared to companies that issue stock, because cooperatives are member-owned and do not have to generate a profit for outside investors. H. How are buyers co-ops able to save their members money? Buying co-ops pool the orders of their individual members and negotiate volume discounts from the suppliers of products and services. Discounts for large quantity orders reduce the cost of goods and services purchased by members. 7

12 5. Distribute a copy of Activity 1.2, Electric Cooperatives Video. Ask students to watch the NRECA YouTube video, NRECA: The Electric Cooperative Story, and answer the ten questions that follow. Video Link: A. In what country were cooperatives first formally organized by a group of weavers? England (United Kingdom); see for more information about the weavers and artisans who established a sustainable cooperative and a set of operating principles that exist to this day B. What U.S. President led the effort to establish rural electric cooperatives? Franklin Delano Roosevelt (FDR), U.S. President March 4, 1933-April 12, 1945 C. What is the primary purpose of cooperatives? To serve the needs of members for products and services D. Who selects the board of directors for cooperative businesses? Cooperative members select members of the board of directors, generally from among the cooperative membership E. What federal agency was established to bring electricity to rural Americans? REA (Rural Electric Administration); see for additional information F. How many Americans get their electric service through cooperatives? 42 million; see for additional information G. How are a cooperative business meeting decisions made? Each member who attends the meeting has one vote and the majority rules H. What are some distinguishing features of cooperatives? Concern for the communities that they serve, democratic control, and exist to serve the needs of members 8

13 I. What organization does the acronym NRECA stand for? National Rural Electric Cooperative Association; see coop/ for more information J. Describe something else that you learned from the video. Answers will vary with each individual student or group of students. Students may need to watch the video more than once to determine answers for this question. 9

14 6. Distribute a copy of Activity 1.3, Co-op Questions. Divide the class into groups of three or four students. To each group, distribute a sheet of cover stock paper with a large T printed on one side and a large F printed on the other. Give the students 10 minutes to discuss the 10 questions in their small group and come to a consensus about the correct answer. Each group should also choose a spokesperson. Then, debrief the activity by asking each group spokesperson to vote true or false with their sign. Discuss the answers shown below. Tabulate the number of correct and incorrect votes and discuss each quiz item. Consider giving a small prize to the top scoring small group(s). Do this activity after Activity 1.1 and a glossary review. A. A primary objective of cooperatives is to provide user benefits. True. A primary objective of cooperatives is to provide a high quality product (e.g., food) or service (e.g., electricity) to its members. B. Cooperative members generally receive a vote proportionate to their purchase of co-op products or services. False. The vast majority of cooperatives follow a one-member-one vote philosophy. A few base votes on business volume. Unlike stockholders in investor-owned corporations, co-op members have an equal voice in decisions, regardless of monetary investment. C. The origin of modern cooperative operations is most often linked to England in True. While rudimentary co-ops for fire insurance existed in colonial America, the principles that modern co-ops operate by today are attributed to the Rochdale Society of Equitable partners in Manchester, England D. All co-op members in good standing can vote in elections for co-op directors. True. Cooperatives are owned and democratically operated by their members. E. Generally, unless exceptions are made, co-op directors are co-op members. True. Co-op directors are generally elected from among the co-op membership. This way, the directors have a familiarity with, and personal stake in, the way that the co-op is managed. 10

15 F. A for-profit community bank is an example of a cooperative. False. Community banks are investor-owned corporations that seek to maximize the returns of their investor shareholders. G. Cooperatives are owned and operated by their members. True. Democratic member control is a core principle of cooperatives. Coops consist of members who buy their goods and services and participate in policy decisions. H. In cooperative corporations, earnings are taxed twice on both corporate and individual (member) tax returns. False. Co-ops have a pass-through designation from the IRS. This means that net earnings that are distributed to members are not taxable at the cooperative level. In consumer cooperatives, patronage refunds may not be taxable to members if they relate to the purchase of household expenditures. Patronage refunds from all other cooperative purchases in agricultural cooperatives and business cooperatives are taxable to the member. I. Cooperatives distribute patronage refunds from net earnings based on how much a member used the co-op s products and services. True. When co-ops return surplus income (profit) to members, this is called a patronage refund. Patronage refunds, as the name implies, are based on a member s patronage; i.e.; how much he or she spends on the product or service offered by the co-op. For example, if a co-op has a profit margin of $10,000 to distribute for the year and Jane Smith accounts for five percent of the co-op s business, she would receive a patronage refund of $500 ($10,000 x.05%). Patronage refunds are generally taxable to recipients as ordinary income in the year that they receive them. J. Cooperatives that provide utility services (e.g., electricity and telephone service) are more commonly found in densely populated cities. False. Utility cooperatives are typically found in rural areas with sparse populations. They were formed by citizens in these areas when investorowned corporations would not provide service where they lived due to the high cost of running wires to a relatively small number of homes. The type of cooperative that is common in densely populated cities is the housing co-op where members receive a place to live in exchange for the purchase of shares of stock of the cooperative corporation. 11

16 7. Distribute a copy of Activity 1.4, Two Banks and a Credit Union: Deposit Account Edition. Divide the class into groups of three of four students. Ask the small groups to go online to compare the features of deposit (i.e., checking and savings) accounts at two local banks and a credit union. Debrief the activity by discussing differences between banks and credit unions in terms of cost, convenience, and other features. It is likely that the students will find higher interest rates paid on checking and savings accounts and CDs at the credit union than at the banks, perhaps with the exception of some online banks. Explain that this is because credit unions are member-owned and do not have to make a profit for outside investors like banks do. Note that it may take students a bit of work to find comparable products and required minimum balances to do this activity. Also, it is possible that differentials among bank and credit union products may vary with different account balances. Check the web sites of banks and credit unions in your community, before assigning this activity, and see how difficult it is to find this information. 8. Distribute a copy of Activity 1.5, Two Banks and a Credit Union: Lending Edition. Divide the class into groups of three of four students. Ask the small groups to read the case study, complete the chart, and answer the accompanying questions. When they have finished, discuss the completed chart and the answers to the questions. Below are the answers for the completed chart and the questions that follow: Lender APR Finance Charge Total Cost Monthly Payment Far Away National Bank 5.0% $ $ 12, $ Hometown Community Bank 4.5% $ $12, $ Friendly Federal Credit Union 4.0% $ $12, $

17 Questions: A. Which car loan is the best deal? Friendly Federal Credit Union has the lowest interest rate (APR), the lowest finance charge, the lowest total cost, and the lowest monthly payment. B. Which car loan is the worst deal? Far Away National Bank has the highest interest rate (APR), the highest finance charge, the highest total cost, and the highest monthly payment. C. Why did the loan that provided the best terms do so? Credit unions operate for the benefit of their members. With no incentive to maximize profits for shareholders, like investor-owned banks have, they generally charge lower costs for loans and pay higher interest on savings than banks. Co-ops do have to make a profit or surplus over time, however, to stay in business and to fund capital investments that are needed by the co-op. Like many types of operations, the cost of future investment may be included in the present cost of doing business. D. How much did Jennifer save by taking the best deal instead of the worst deal? $ ($12, $12, ) E. How could Jennifer have saved even more money on her car purchase? She could have paid cash for the car and not incurred any interest charges at all (but there would be an opportunity cost for the next best alternative for the cash spent to buy a car). Another option is to shop around some more to find even lower interest rates than those stated above. A third option is to take out a loan for a shorter time period (e.g., 24 months), which would reduce the interest charged. F. Where can Jennifer find information about the monthly cost of car loan payments? Students will likely share a variety of responses. Three good online loan calculators are available through FINRA ( Calcs/1/Loan) and Bankrate.com ( mortgages/loan-calculator.aspx) and Auto Loan Calculator ( autoloancalculator.com/). 13

18 G. What are the pros and cons of using banks and credit unions? Banks often have many conveniently-located branches and a wide array of financial services but their costs are generally higher than those of credit unions because they are profit-driven. Credit unions have lower costs than banks and higher rates of interest on savings, but require some type of affiliation relationship to become a member and generally have fewer offices where consumers can transact business and fewer types of financial services. H. What are the take-away messages from this activity? 1. Follow the Rule of Three when making a purchasing decision by comparing three product providers, 2. The lower the interest rate on a loan, the lower the total cost, and 3. Credit unions generally charge a lower APR on car loans than banks. 9. Distribute a copy of Activity 1.6, A Conversation About Co-ops. Ask for four volunteers to read the speaking parts of Brittany, Carlos, Matthew, and Bella, respectively, in a short skit about cooperatives. Then debrief the activity by having small groups discuss follow-up questions and debriefing them with the entire class. A. What are the advantages and disadvantages of belonging to a food co-op? Many food co-ops sell organic foods and provide them to members at an attractive price. Food co-ops, like supermarkets, also buy food in bulk which lowers member costs. A disadvantage of food co-ops, for some people, might be a member service requirement (e.g., stocking shelves, ringing up sales, dividing up bulk food orders) that helps lower food costs. In addition, food co-ops are not as plentiful as supermarkets and may require driving a distance to pick up food and fulfill the service requirement. B. What are some reasons why people choose to belong to food co-ops? Food co-op members are often health-conscious people who are interested in purchasing unprocessed and organically grown foods. Food co-ops provide them with an opportunity to meet and work with like-minded people and to purchase the food that they are looking for at an attractive price because the co-op buys it in bulk. There is also often a social dimension to food co-op membership that members enjoy. 14

19 Note, however, that most large chain grocery stores now carry organic foods and/or bulk food items, mostly because co-ops demonstrated that there was demand for such items. The price that food co-ops charge is often higher than what is charged at large grocery stores because large chains buy in larger quantities than local food co-ops. C. What are the advantages and disadvantages of credit unions? Advantages of credit unions include higher interest rates on savings and lower interest on loans than banks and an opportunity to affect a credit union s policy-making decisions through member ownership. Disadvantages of credit unions include the need to meet member qualifications to join and the fact that credit unions do not have nearly the number of branches that banks do. This can make them inconvenient for people who need to visit a credit union frequently to cash checks and make ATM withdrawals. D. What are some reasons why people choose to belong to credit unions? For many people, credit unions are affiliated with their place of employment which makes them convenient for direct deposit and automatic savings. Branches might be located right in the building where they work. Other people are drawn by their lower cost compared to banks. In the aftermath of the financial crisis, there was a backlash by some people against the fees charged by big national banks and credit unions, along with community banks, were touted as a lower-cost alternative. E. Do cooperatives always save people money? Not always. There are certain to be cases sometimes when banks charge less than credit unions or supermarkets charge less than food co-ops, for example. For many people, however, price is not the only factor that they consider when purchasing products and services from a cooperative business. Quality products and services and dependable service are also important as is personal service (e.g., credit union members are more often recognized personally by name). F. Does anyone in your family belong to any type of cooperative? Answers will vary among groups of students. Instructors should do an online search for cooperatives in their community so they will recognize the names that are discussed. 15

20 Distribute a copy of Activity 1.7, Co-ops in the News. Divide the class into groups of three of four students. Ask the small groups to go online and find a news article about a specific consumer cooperative business and then visit the cooperative s Web site for additional information. Each group should also choose a spokesperson. Ask each spokesperson to provide a 2 to 3 minute summary about the co-op that the group selected including its industry sector, location, number of members, membership requirements, products and services, and other notable features. An alternative learning activity would be to turn assignment 1-7 into a written assignment or extra credit activity where students would be asked to write a 1 to 2-page paper or school newspaper article describing what they learned during their online investigation of cooperatives in the news. Note that not all cooperatives provide information on membership costs, total number of members, or trade area on their web sites. You can still encourage students to make their best inferences. A student visiting a consumer cooperative web site can probably infer that it has a large number of members while a local food cooperative would have much fewer. You can also ask students to consider what they would pay to join a particular type of cooperative. 16

21 CLOSURE Ask students if they have any remaining questions about cooperatives. Encourage them to check with their parents to see if they are one of the approximately one in three U.S. households who are members of a cooperative business. Many people belong to cooperatives, or purchase their products and services, and don t even know it. GLOSSARY Cooperative A member-owned business or organization that is operated by the people that use its products and/or services. Credit Union A member-owned financial cooperative that is controlled by its members and provides a range of financial services such as checking and savings accounts, credit cards, and loans. Member Also known as a user-owner, a member is a person who meets qualifications for membership in a co-op (e.g., place of employment, place of residence) and purchases a required number of shares to belong. One Member/One Vote A core principle of the democratic organization of cooperatives where each member gets one vote on cooperative business decisions (e.g., election of directors) regardless of their monetary investment in the cooperative. All votes are weighted equally. By operating in this manner, a select few members who are large investors cannot dominate the decision-making process. Pass-Through Entity Term used to describe the fact that cooperatives that comply with IRS rules do not pay federal income taxes as a business entity. Surplus earnings returned to members are taxed only once at the individual level on members income tax returns and not at both the corporate level and the individual level. Thus, co-ops differ from other businesses where corporate stock dividends are taxed twice. Patronage Refund Term used to describe a return of profits to co-op members based on how much they have used a co-op s products and services (i.e., their patronage). Like corporate boards of directors with stock dividends, co-op boards can distribute cash refunds to members or retain a portion for business reinvestment. 17

22 Profit Term used to describe the situation where a co-op generates a surplus of income over expenses. When this happens, profits are returned to co-op members (and occasionally non-members, depending on a co-op s bylaws) in the form of patronage refunds based on how much they use the co-op s products and services. Share Individuals portion of a cooperative organization that establishes them as an equal member/owner. All members shares are exactly equal. 18

23 ASSESSMENT Instructors are encouraged to use the 20-question multiple choice and 10 truefalse question quiz and two short answer questions below as a pre-and post-test to determine gains in student knowledge about cooperative businesses after teaching this lesson. Correct answers to the multiple choice questions are shown in boldface type. Multiple Choice Questions 1. Members can become part of a cooperative through the purchase of a. dividends b. shares c. patronage refunds d. cooperative reserve funds 2. Cooperatives are governed by a. a manager and staff b. a President c. a Board of Directors elected from the membership d. outside investors who purchase stock shares 3. Day to day operations of cooperatives are run by a. a manager and staff b. a President c. an elected Board of Directors d. outside investors who purchase stock shares 4. The return of profits to co-op members proportionate to their use of a co-op s goods and services is called a a. dividend b. rebate c. profit exchange d. patronage refund 19

24 5. The primary purpose of consumer cooperatives is to a. produce a profit b. increase market share c. provide tax-exempt income to members d. deliver goods and services to members at affordable prices 6. A person who both shops at and has an ownership interest in a cooperative is called a. an approved investor b. a member c. an affiliated user d. a director 7. The origin of the procedures that modern day cooperatives operate by is attributed to a. Mutual of Omaha Insurance b. National Farmer s Cooperative c. Rochdale Society d. Wal-Mart and Sam s Club 8. A document created by members of a co-op to describe membership requirements and responsibilities and operating procedures is called a. bylaws b. IRS code ruling 72(t) c. a LLC d. an industry permit 9. Members have direct input into the operations of a cooperative by a. answering membership surveys b. receiving co-op newsletters c. buying co-op products and services d. voting at annual meetings 20

25 10. Which of the following is a benefit of belonging to cooperatives? a. Provides tax deductions for members b. Provides access to products and services at affordable prices c. Generates capital gains for investors d. Members provide day-to-day management of co-op operations 11. Which of the following is the name for a member-owned financial institution with checking and savings accounts? a. Community savings bank b. Commercial bank c. Credit union d. Savings and Loan Association 12. Cooperatives can simply be defined as a a. type of non-profit organization b. special category of business operation c. charitable organization designed to help people in need d. government-sponsored business operation 13. The first modern day cooperative business model was formed in England in a b c d What types of people do cooperatives have that other types of businesses do not? a. Members b. Shareholders/investors c. Board of Directors d. Management and staff 21

26 15. How many votes do those who attend cooperative business meetings typically have? a. Twice the voting rights of cooperative management and staff b. It depends on the amount of their monetary investment in the cooperative c. It depends on the amount of cooperative products/services that they buy d. One vote per member regardless of monetary investment 16. How many levels of IRS federal income tax are there on surplus earnings returned by cooperatives to their owner-users? a. 0 b. 1 c. 2 d Approximately what proportion of Americans belongs to one or more cooperatives? a. 1 in 2 b. 1 in 3 c. 1 in 4 d. 1 in Which is NOT a reason for people to belong to a cooperative? a. Obtain an affordable product or service b. Obtain a high-quality product or service c. Have a say in how a product or service is delivered d. Maximize profit on their monetary investment 19. The name used for credit union checking accounts is a. share account b. share advantage account c. share draft account d. share plus account 22

27 20. Which word is often used in the names of cooperative banks and insurance companies? a. Cooperative b. Mutual c. Affiliated d. Unity True-False Questions 1. Cooperatives do not have to cover all of their operating costs to remain viable entities because they are non-profit. (FALSE: Cooperatives must cover operating costs) 2. The largest numbers of cooperatives are in the U.S. agricultural industry sector. (FALSE: The largest numbers of cooperatives involve consumer products and services) 3. Some cooperatives require their members to provide a contribution of volunteer time. (TRUE: Volunteer service lowers the cost of cooperative products and services) 4. Utility cooperatives are generally located in urban areas with large populations. (FALSE: Utility cooperatives are generally located in sparsely populated rural areas) 5. Some rudimentary cooperative-like entities were formed to provide fire insurance in the U.S. during colonial times. (TRUE: Benjamin Franklin is credited with being associated with these initial cooperative ventures) 6. People who belong to cooperatives must wait until the annual business meeting to join or leave. (FALSE: People can join or leave a cooperative at any time without affecting its business operations) 7. Some cooperatives have recognizable names due to national advertising for products or services that they sell. (TRUE: Examples include Nationwide and Mutual of Omaha insurance and Land O Lakes butter) 8. Credit unions often pay higher interest rates on deposit accounts than commercial banks do. (TRUE: Unlike commercial banks, credit unions do not have to earn a profit for shareholders) 23

28 9. Mutual insurance companies return profits in excess of operating costs and reserves as dividends to their policyholders. (TRUE: Mutual insurance companies are owned by their shareholders) 10. Housing cooperatives are generally located in rural areas with sparse populations. (FALSE: Housing cooperatives are generally located in densely populated urban areas) Short-Answer Questions 1. Describe why a credit union is a type of cooperative business. Credit unions are owned and democratically controlled by their members. They elect directors from among their members and every member has one vote regardless of the size of their account balance. 2. Besides a credit union, list three different types of cooperative businesses. Answers will vary with each student and can include agricultural co-ops, food co-ops, utility co-ops, housing co-ops, child care co-ops, funeral co-ops, mutual insurance companies, and mutual savings banks. Constructed Response Items 1. What factors should people consider before joining a cooperative? Students should discuss the location of their residence (i.e., is it within the territory of a cooperative utility company?), quality of service, time commitment, and cost. 2. Do any of your family members belong to a cooperative? If so, describe which one and what you know about it. Responses will vary with each individual student. Instructor should become familiar with local cooperatives to verify the accuracy of students responses. 24

29 REFERENCES About Co-ops (2012). Washington, DC: National Cooperative Business Association. Retrieved from Buying Groups and Co-ops: The More the Merrier (and Cheaper) (2013). Startup Nation. Retrieved from Consumer Cooperative. (2013). Wikipedia. Retrieved from wiki/consumer_cooperative. Consumer Cooperatives (n.d.). Washington, DC: Consumer Federation of America. Retrieved from Consumer Cooperatives: Part of Our American Fabric. Washington, DC: Consumer Federation of America: pdf. Cooperative. (2013). Washington, DC: U.S. Small Business Administration. Retrieved from Cooperative Vocabulary (2012). Retrieved from Cooperative_Vocabulary. Cooperatives (2013), College Park, PA: Penn State Extension. Retrieved from Cooperatives and Profit: What is the Relationship? Retrieved from wedge.coop/newsletter/february-march-1997/cooperatives-and-profit-whatis-relationship. Food Co-ops (2012). Washington, DC. National Cooperative Business Association. Retrieved from food-co-ops. Health Care Cooperatives: Definitions and State Examples (2011). Washington, DC: American Academy of Family Physicians. Retrieved from aafp.org/dam/aafp/documents/advocacy/coverage/insurance/es-healthcare CooperativesDefinitionsandStateExamples pdf. High School Cooperative Syllabus (2012). extension. Retrieved from extension.org/pages/63097/high-school-cooperative-syllabus#.ufqbktrd-m8. 25

30 How Agricultural Cooperatives are Taxed (1995). University of Missouri Extension. Retrieved from How Housing Cooperatives Work (n.d.). Retrieved from howstuffworks.com/real-estate/housing-cooperatives.htm. Organize a Child Care Co-Op. (2006). Retrieved from organize-child-care-co-op html. Patronage Dividends: A Primer (2008). Retrieved from cooperativegrocer.coop/articles/ /patronage-dividends-primer. Tax Treatment of Cooperatives (n.d.). Retrieved from rbs/pub/cir23/cir23.html. Teaching Cooperatives (2010). Cultivate.Coop. Retrieved from coop/wiki/category:teaching_cooperatives. The structure of cooperatives (2011). U.S.D.A. Rural Development. Retrieved from Understanding Cooperatives. (n.d.) Win-Win Solutions Unit 3. Retrieved from curriculum/eecurriculum_unit3.pdf. Understanding Cooperatives-Quiz 5 Answers. (n.d.) U.S.D.A. Rural Development. Retrieved from youthprograms/web/usdacurriculum_mnedition/unit5/quizanswers5.htm What is a cooperative? (2013). Kansas State University. Retrieved from accc.k-state.edu/coops101/whatiscoop.html. What are patronage refunds? (1993). Washington, DC: U.S. Department of Agriculture. Retrieved from 26

31 LEARNING ACTIVITY WEB SITES Live Cooperative Activity: coop%20activity.pdf. This activity is a hands-on mock cooperative experience that teaches students how cooperatives work, how they are governed, and how they benefit their members. Net Income Worksheet Activity: Net%20Income%20Distribution%20Wksht.pdf This activity provides a hands-on experience to help students understand how net income from a cooperative is distributed to members. 27

32 OPTIONAL LEARNING ACTIVITIES u For extra credit or as an additional student learning activity, ask students to visit a consumer cooperative in their community and provide an oral or written report on their interview with co-op management and/or members. u Ask students to identify cooperatives in their area (e.g., town, city, or county). Encourage them to contact a local co-op, introduce themselves, describe the project they are working on, and request additional information about the cooperative. u Invite a guest speaker from a local cooperative to visit your class to discuss how cooperative businesses operate. For example, a director or employee of a food co-op or credit union can discuss real world examples of cooperative practices. u Ask students the following question: Why don t we see more co-ops if they are so good? Answers could include the need to organize people with some type of a common relationship, very specific regulatory requirements, and consumer needs that are being adequately met by investor-owned corporations. u Ask students the following question: Where would you expect more cooperatives to form? Answers could include pre-formed groups of people, such as churches and places of employment, and rural areas that are underserved by investor-owned corporations. 28

33 Cooperatives in Your Community What is a Consumer Cooperative (Co-op)? Consumer Cooperatives Lesson 29

34 What is a Cooperative (Co-op)? Business/organization owned and operated by its customer members Exists to provide products or services to members Involves both consumer and agricultural industries 30

35 Co-op Facts More than 100 million Americans belong to one or more cooperatives (about 1 in 3) Largest number of co-ops involve consumer products and services Vary in size from small store fronts to large national level businesses 31

36 More Co-op Facts The objective of cooperatives is to provide high quality products or services at the lowest net price to members. They are a special category of corporations. Profits are returned to members via patronage refunds based on members purchase or use of co-op products and services. 32

37 Co-op Governance One member/one vote (democratic decisions)- 95% of cooperatives; a few vote by business volume Elected board directors from among membership Generally, there are no outside directors as is the case with investorowned corporations Elected board hires management and staff 33

38 Ben Franklin started a co-op to provide fire insurance for homes Modern co-op model attributed to Rochdale Society in 1844 in Manchester, England Developed a set of organizing principles Some consumer co-ops have recognizable names REI (Recreation Equipment Inc.) Nationwide Insurance Co-op History 34

39 Types of Consumer Co-ops Health care co-ops Mutual insurance companies Wholesale distribution co-ops Buying co-ops Funeral co-ops Student housing and bookstore co-ops 35

40 Types of Consumer Co-ops Credit unions Electrical co-ops Telephone co-ops Housing co-ops Food co-ops Child care co-ops Nursery school co-ops 36

41 Credit Union Credit Unions vs. Banks Owned by customer members Similar products and services to banks Return profits to members resulting in favorable interest rates for savings and loans Fewer brick & mortar locations than banks Requires some type of membership affiliation relationship 37

42 Credit Unions vs. Banks Commercial Bank Financial institution owned by investing stockholders Often charge higher interest on loans and pay less interest on savings than credit unions (to provide a return on investment to stockholders) Generally have more convenient branch access than credit unions 38

43 Credit Union Credit Unions vs. Banks Owned by customer members Similar products and services to banks Return profits to members resulting in favorable interest rates for savings and loans Fewer brick & mortar locations than banks Requires some type of membership affiliation relationship Commercial Bank Financial institution owned by investing stockholders Often charge higher interest on loans and pay less interest on savings than credit unions (to provide a return on investment to stockholders) Generally have more convenient branch access than credit unions 39

44 Some Co-ops Require Members to Volunteer Service Common among food and nursery school co-ops Member volunteer labor reduces operating costs Lower costs passed on to co-op members Volunteer service can build member camaraderie 40

45 Glossary of Cooperative Terms Cooperative Credit Union Member One Member/One Vote 41

46 More Cooperative Terms Pass-Through Entity Patronage Refund Profit Share 42

47 Questions About Cooperatives? 43

48 44

49 Activity 1.1 Cooperative Facts and Discussion Questions Cooperatives (also known as co-ops) can be found around the world. A cooperative is a business or organization that is owned and operated by its members. Co-ops come in a variety of sizes from small store front operations to large corporations. More than 100 million Americans (of about 318,000,000 in 2014) participate in coops. That translates to about one in three Americans having a co-op affiliation as an employee or customer. The cooperative form of business ownership has been in existence for centuries. Ben Franklin is credited with forming America s first successful co-op to provide fire insurance for homes. The modern cooperative business model is attributed to formation of the Rochdale Society of Equitable Partners in England in A set of organizing rules called the Rochdale Principles became the basis for how coops still operate. Members become part of a co-op by purchasing a required minimum amount of shares (e.g., $25 to open a credit union share account). The vast majority (about 95%) of cooperatives follow a one member-one vote philosophy. Each member has one vote (regardless of the dollar amount of shares purchased) at the co-op s annual business meeting so members share equally in the decision-making process. A few cooperatives base voting rights on the amount of business volume. Some co-ops have a work requirement for members, such as members of a food co-op working a certain number of hours to run the cash register or stock store shelves. For other co-ops, service hours are not required and members activities are limited to product use and attending the annual business meeting and voting on business items. The members of a co-op buy its products (e.g., food) or use its services (e.g., electricity) and share in profits generated by the co-op. Maximizing profit is not the primary purpose of a co-op, however. Provision of an affordable, high quality product or service for co-op members is. Thus, co-ops exist to serve the needs of their member-owners. Cooperatives must be profitable, however, to remain in operation. Co-ops are governed by an elected board of directors that is generally chosen from among the co-op membership. Co-op boards then hire management and staff to run a co-op s day-to-day operations. While cooperatives are widespread in the U.S. agricultural industry sector, the largest numbers of co-ops involve consumer products and services, particularly credit unions for financial services and utility co-ops for telephone and electric service. Members can freely join or leave a co-op (e.g., when they move) without affecting its business operations. 45