$coring the $corecard

In a recent blog post I lauded the 2016 Annual Meeting as a great example of the kind of transparency that could really help the Co-op secure its future. But in terms of financial reporting, the record is mixed.

For some reason, the Co-op hasn’t released its 2015 audited financial statements.  The complete 2014 financials are on the web site and, to my knowledge, every previous year’s audited financial statements have been made available to members.  Indeed, for years and years the Co-op mailed this document to each member as part of its annual report.

Instead, what the Co-op has done this year is release a document it calls the “2015 Co-op Scorecard – 13 pages of promotional material (including brief essays by Board President Margaret Drye and General Manager Terry Appleby) followed by a three-page summary of the 2015 financial results.

According to the scorecard, sales fell by nearly $5 million in 2015 (from roughly $75 million to just under $70 million), a decline the Co-op (reasonably, in my view) attributed to a sharp drop in the price of gasoline and, more significantly, the hassle and disruption caused by the renovation project at the Hanover Store.  The question, of course, is whether the Co-op bounces back in 2016 now that the renovation is complete.

Though questions remain over whether the Co-op is slowly losing market share, as it has for the past several years the Co-op reassures the membership by pointing out that effective management and efficient operation have kept the organization running in the black.  For 2015, the scorecard reports a “modest” net savings of $81,042.

Sigh . . . what we have here, in effect, is a gift from the Co-op to the Internal Revenue Service.   When the Co-op issues a patronage refund, it can elect to deduct the amount from its taxable income.  But this year the available surplus was too small to make a patronage refund a practical option – the cost of issuing it would have been too high relative to the amount to be refunded.  So, all of the Co-op’s profits were taxable this year.

You don’t see this directly on the scorecard, but there is indirect evidence.  From 2014 to 2015, savings before taxes and patronage refund went from $844 thousand to $204 thousand, but the Co-op’s tax bill did not drop by a proportional amount.  (It went from $172 thousand to $123 thousand.)  When I inquired about this at the annual meeting, the Co-op’s auditor (Steve Austin of the Gallagher Flynn CPA firm) blamed New Hampshire’s business profits tax, but I think he’s wrong.  (To be fair to Steve, he wasn’t expecting my question.)

Astute members will wonder why “too expensive to issue” is an excuse for not paying out the surplus as a patronage refund since it is now the Co-op’s policy to issue refunds not in cash but in so-called “B shares.”  Answer:  The Internal Revenue Code requires that at least 20 percent of the patronage refund be issued as cash.

A year ago, at the end of fiscal 2014, the Co-op did exactly that.  It paid out a refund of just over $500 thousand in the form of 20 percent cash and 80 percent B shares.  This, as Terry Appleby disclosed at the annual meeting, prompted a complaint to the New Hampshire Secretary of State.  (He did not disclose how the complaint has been resolved.)  The Co-op has made clear since it first issued B shares a year ago that the intention is never to redeem them; the money, though allocated to members, is designed to be used by the Co-op on a permanent basis.

In an effort to explain and to justify this, Terry referred to the idea, embedded in the Cooperative Principles, that members should from time to time allocate some of their surplus as the “indivisible” capital of their co-op.

This is important!  It’s worth quoting the applicable principle (Cooperative Principle #7, as promulgated by the International Cooperative Alliance) in its entirety:

3. Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

Terry is right.

Indeed, I’d be a hypocrite and a liar if I said otherwise, given that I was the Co-op’s treasurer during the last three years of my previous Board service and drafted (in collaboration with the Co-op’s finance director and outside counsel) the 2013 bylaws amendments that authorized the issuance of B shares.  When the membership approved the 2013 bylaws amendments (and again when the membership adopted corresponding changes to the Co-op’s articles of organization the following year), members were literally buying into this Principle 3 notion that when the Co-op needs to build up its capital, patronage refund money will stay with the Co-op on a permanent basis, more or less.

I say “more or less” because one power reserved to the membership under New Hampshire law (legal mavens can read RSA 301-A:15) is to force the Co-op, by majority vote at a membership meeting, to cash out member shares.  A move like that would be the equivalent of a terminal illness for the Co-op; I would resist it vigorously.

Presenting this year’s financial results at the annual meeting, the Board’s current treasurer attributed the lack of a patronage refund for 2015 to the Co-op’s need to build up its capital.  I think he was mistaken; such a need would, as noted above, explain issuing 80 percent of a patronage refund as B shares.  But it would not explain operating results that led, in essence, to no money left over for such a refund.

An interesting question is:  Where does the Co-op go from here with respect to its balance sheet?  By one measure, the Co-op is quite financially healthy.  The Co-op borrowed about $3.5 million in 2015 to finance the Hanover store renovation and, as a result, had a debt/equity ratio of almost exactly 1:1 at the close of the fiscal year.  The Co-op is now neither over- or under-leveraged and I was glad to see the organization borrow a pile of cash.   But is a $15.6 million balance sheet enough of a platform from which to operate a $75 million/year business with 400 employees? 

The answer is probably “no” but turns on what the Co-op would do with more wealth.  Figuring out answers to questions like that is what makes service on the Board so interesting and important.

Meanwhile, I will report back when I get an answer to my request to the Co-op for a copy of the 2015 audited financial statements.  Please don't forget to vote at mycoopvote.com!