Each year the board of directors determines whether the co-op’s financial position permits the return, or retirement, of capital credits and, if so, what amount of capital credits will be retired.
The board also decides the method for determining which capital credits are returned. For example, many cooperatives retire capital credits using the First-in, First-out, or FIFO, method. That means that the capital credits that have been invested in the cooperative for the longest period of time are returned to members first. A cooperative using the FIFO method might return capital credits allocated in 1984 to members in 2004.
Other co-ops retire capital credits using the percentage method. That means that a portion of the total amount of capital credits allocated to a member over time are returned each year.
Another way to retire capital credits is to use a combination of methods, such as the FIFO/Percentage hybrid, which makes part of the capital credits retirement on the FIFO basis and part using the percentage method. The Last-in, First-out, or LIFO, method, which repays capital credits that have been invested in the cooperative for the shortest period of time first, is rarely used alone, but the FIFO/LIFO hybrid is a popular approach.
The approach that works best for an individual system depends on a number of factors, including the age and tenure of its membership.