After Hours with Jamie Rubin: What Do We Owe Nonprofits, Anyway?

Many of New York’s essential services are run through nonprofit contracts, but 90% of City payments to those nonprofits were late last year. In response, many nonprofits are on the brink of closing their doors. There’s a structural problem here: It’s hard to build unified nonprofit power because many nonprofits are small and specialized. 

John MacIntosh has a solution — actually, several. As managing partner of SeaChange Capital Partners, he leads a team that provides a suite of services to nonprofits, including business advisory and bespoke financing for the sector. 

On this episode of After Hours, Rubin and MacIntosh talk about what the City and private players can do to help the sector that supports so many New Yorkers.

You can listen to the episode, “What Do We Owe Nonprofits, Anyway?,” on Apple Podcasts or Spotify. And read Macintosh's article about the nonprofit sector’s future under the Trump administration, "Winter is Coming," in our latest issue "Nonprofits and the City." 

TRANSCRIPT:

Jamie: You're listening to After Hours with Jamie Rubin of Vital City Podcast. I'm Jamie Rubin.

Molly: Jamie, I'm in Connecticut today, and I know you’ve spent some time here over the years. I don't know if you know this, but very recently Governor Ned Lamont has added billboards on I-95 when you cross state lines that claims Connecticut as “the pizza capital of the country.” 

Jamie: So I've actually thought a lot about this.

Molly: You're a pizza expert now? 

Jamie: I'm not. I have to claim New York as the center of the pizza world because that's my job as a New Yorker. The problem I have is that I haven't had a piece of pizza in probably ten years. I mean, when I left the pizza world, I thought that New York was the center of the pizza world, but that's because I loved New York pizza, the kind that I grew up eating—you know, very doughy, very greasy. I gather it's changed a lot. I can't really speak to where it stands today. I just have to stand on my roots and say it's gotta be New York. But I'm not doing it based on evidence, which makes me uncomfortable. 

Molly: What made you retire from the pizza community? 

Jamie: Really? My wife, Gretchen, impressed on me the danger of overindulging in pizza, basically.

Molly: Do you have a favorite pizza place? 

Jamie: I did growing up, Don Filippo, right around the corner from where I lived. 

Molly: Is it still there? 

Jamie: It's still there. I just checked. 

Molly: Oh good. So question. Can we get Don Filippo to sponsor the show? 

Jamie: Uh, we can certainly try. I can absolutely guarantee you this would be the first podcast that Don Filippo has sponsored.

Molly: Don Filippo I know you're listening. Please reach out. We are excited to welcome you on board as the newest (first!) sponsor of After Hours with Jamie Rubin of Vital City Podcast: sponsored by John Filippo.

Jamie: Okay, well, enough pizza. Let's talk about John MacIntosh and the world of nonprofits. 

Molly: Jamie, who is John MacIntosh?

Jamie: John MacIntosh is a friend of mine who was, for a long time, a partner at a private equity fund in New York City called Warburg Pincus. He left mid-career and became the managing partner and an early founder of SeaChange Capital Partners. John started SeaChange with a couple of other guys who were also from the finance world with the mission of helping nonprofits access the same high end financial advisory work that for-profit organizations get much more easily.

Molly: I want to hear more about John, but first I need to know what the difference is between fuh-nance and fye-nance. 

Jamie: They're the same thing, but if you call it fye-nance, you're flagging for other people that you're not from fuh-nance. 

Molly: So if you're in the club, you can call it fuh-nance. 

Jamie: We can't even talk about that. I'm sorry.Would you like to know what John does? 

Molly: Yeah, I guess we can. Tell me what John does. 

Jamie: John provides funding, which is pretty self-explanatory, and also advisory work to nonprofits, and then he sort of mixes the two together a lot of the time when there's a particularly complicated problem.

For example, nonprofits in New York City, and other places too, often have the problem that they are being promised a grant from somebody, but it hasn’t hit their books yet. So they have full expectation that they'll get the funding. In between, they have a problem with cash. John works with them to try to figure out how to bridge from where they are today to the point where they get the grant money in their bank account.

Molly: He really helps nonprofits survive longer than they might otherwise. 

Jamie: Yeah, and I think he'd be happy to hear you say that that's what he does. 

Molly: Well, I do want to always make John happy. I know he wrote an article for this Vital City issue. Why did you want to talk to him? 

Jamie: John's an innovator in this field. He's also, you'll find out, a very smart and high-energy guy. He loves the nonprofit sector; he loves the nonprofits he works with. He cares deeply about the work that they're doing. He also sees the weaknesses that they've got inherently and how difficult it is to run a nonprofit. And he's got some really unvarnished opinions that he's happy to share about how the nonprofit sector can be made stronger and more sustainable over time.

Molly: I will say, as someone who knows less about this stuff than John, certainly, it makes me feel a lot better that someone with his passion and excitement for this is on the case. 

Jamie: That's exactly right. And it was a great conversation.

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Jamie: You and I are in violent agreement on almost everything we're going to talk about in this interview. But you and I also have plenty of people who are with all good intentions — the best will in the world — want to be helpful to people who work in the nonprofit industry, but come to it from the following perspective: “Why are there any small nonprofits in this city? It makes absolutely no sense. Why aren't there just, I don't know, ten really large nonprofits that get the benefit of the dreaded efficiencies of economies of scale? And, you know, they can work with the government, they can collect from large foundations, they can do all that great stuff. Why is there a nonprofit on every block serving every little community and doing the exact same thing that the nonprofit on the next block over?”

John: Why are there so many restaurants? Wouldn't one really good Mexican restaurant be enough?

Jamie: Yeah! What's the answer? Did I give the wrong answer? I think I might have given the wrong answer.

John: Well, no. I lecture at Columbia and Penn from time to time. The first question I ask people is, “Why do nonprofits exist?” Before we get into it, I was like, “Why?” As Frederic Jameson said, it's harder to imagine the end of capitalism than it is to imagine the end of the world.

I say, is that true for nonprofits? Could you imagine a New York without nonprofits? I think the answer to why nonprofits exist is twofold. That citizens say to themselves, “There is something which the political process isn't providing — maybe shouldn't provide — and so as a board member, as a donor, as a staff member, I'm going to do this thing. I'm going to join the board of the Brooklyn Heights association or plant flowers or do whatever it is.” Let's call that the sort of the supply side of money and talented people. That urge isn't going to be curbed into a small number of very large and arguably more efficient organizations. It isn't.

Jamie: I agree with that. 

John: And I think on the demand side, government has decided, and I think they're right, that — maybe it's because of the principal-agent problem, maybe the lack of a profit motive is one less reason to shirk — that in a lot of areas, nonprofits are better partners.

And so, yes, you can get your knickers twisted, as they say, with all the little tiny groups getting discretionary items, “Oh my goodness, this isn't very efficient.” We shouldn't get distracted by the large number of smaller groups that from a budget standpoint, don't add up to a hill of beans. I don't really think it matters.

I think that there are good historical and political reasons — we could go back to de Tocqueville — that make me happy. If Cheryl Effron and Jamie Rubin want to start Greater New York, they can. No one says, “Wait, you know, this should be a program of NFF [Nonprofit Finance Fund].” You wouldn't feel the same way about Greater New York if it were a program of NFF — and I love NFF — you just wouldn't. And we shouldn't fight that. 

Jamie: I'm not taking the bait and talking about de Tocqueville because I'm not qualified to do that. By the way, it's not like size is a guarantee of quality in the world of nonprofits, like anything else. We can all come up with examples of really large nonprofits that got over their skis, and for one reason or another basically failed. It does happen.

I think there's something else going on when people say, well, “There should only be a small number of favored large nonprofits and we should just execute mergers between every small nonprofit and have nothing exist anymore.” It has a lot to do with the fact that not everybody — correctly — largely feels that the nonprofit sector in New York and elsewhere basically serves people who are really poor.

They're basically the people who need the services and can't get them somewhere else. That's somewhat true at least. There's some notion that basically people should sort of be grateful for what they're getting from that sector. What's really important is that it be delivered quite efficiently.

If you are somebody who doesn't need the service of a nonprofit or social service agency, you have no interest in going to the largest possible provider. You want your doctor to be the greatest doctor in the world who sits in one office and doesn't have to answer to some giant corporation that can give you tailored, bespoke service and understand your specific needs. 

Why shouldn't that be true when you live in Bushwick? And what you want to do is deal with somebody who is the head of this block in Bushwick’s community service organization, who really has a sense of what matters to people who live in Bushwick.

John: I would say two things. First of all, it's true that the large social service organizations are generally working with lower-income New Yorkers funded by government, but you know, everything I enjoy in New York is nonprofit provided except food. I played beer league soccer on Wednesdays and that's organized by a nonprofit, Play Study Win.

My kids went — I know you can say, “Oh, well, John, that's not really a nonprofit” — they went to private school, which are 501(c)(3)s. I go to the public theater, I go to BAM. I do think that we need to be careful to not collapse nonprofits into social service nonprofits.

Jamie: I just want to lodge my objection to your making it clear that I am a Philistine. I went to BAM like, I don't know, six-ish years ago? 

John: No, no, no. I wasn't arguing that you're a Philistine. I was arguing that you probably don't reflect on the fact that when you're at BAM, you're sitting in a 501(c)(3). I mean, I wouldn't. I'd reflect on whether the show's any good. But for the purpose of this conversation, we've looked at 1,400 mergers — this is nationally — we've supported about 300 of them. We've seen firsthand that while it's very, very hard, I think you can have your cake and eat it too, that what people deliver and what — to use your example, low-income New Yorkers consume — are programs. They don't really consume organizations, right? For example, I don't get Good Shepherd. I get a particular after-school program. I think if you work really hard and you do it right, you can deliver programs that have a lot of the neighborhood connection and the emotional connection to the individuals, even if they're part of an institution that has the benefit of scale.

I also feel like there's some complexity around managing a super large organization. We know a number of groups, and I could mention them by name, who I think would say, “Once I got to the 100-million-dollar mark in New York, roughly, that I wasn't really seeing any efficiency benefits, but I was starting to see some constraints in terms of management complexity and in terms of funding models, and so I just kind of like to hang out here and not grow anymore, because I'm done.”

Jamie: That all makes perfect sense. Let's pivot. Let’s start talking about funding. Maybe just to take two seconds to explain in a clinical way how the city pays its nonprofit partners.

John: If you're doing an afterschool program and you have a contract from the city, what the city basically does to protect itself is say, “Hey, you're going to do this after school program. We're going to pay you — let's keep the math easy — $1.2 million to do a year of work.” So quick math, that's $100,000 a month, but they don't give you the $1.2 million upfront.

What they say is “Each month, submit a voucher after the fact, and an invoice. Show us that you spent the 100,000 as you were supposed to, and we'll reimburse you.” So nonprofits are waiting to get paid and the whole logistical morass about how long did it take for the invoice to be seen? Was there a missing I, an uncrossed T? — that whole thing means that payment can take months and months and months, and so our nonprofit may be six months into its contract. It may have spent 600,000 but may have only received 100,000 or 200,000. That payment delay, that working capital strain, is really a problem for many nonprofits. 

Jamie: You've already said a number of times the government has — the city government, for example — really has turned over a lot of essential services to the nonprofit sector. Mostly the social services sector.

John: Absolutely. 

Jamie: But there are consequences to that. Let's talk about how the city government interacts with the nonprofits that it funds. 

John: I think the answer is that from a financial perspective, it interacts with them very badly. We have a super complicated system that, even when the city is fully staffed, imposes huge burdens on nonprofits at all sorts of levels.

If you're running Rubin enterprises and you're trying to decide, are you going to bid for a city contract? You can do three things. You can say, “eh, life's too short. I don't want to work with the city,” but most not for profits can't say that because they're only in New York City.

Or you'll say, “you know what? Special price for the City. I know it's going to take a long time to get paid. So I'm either going to bake in some premium for the time I'm going to have to wait and the hassle,” but nonprofits can't do that either because the City contracts by nature are cost-reimbursement contracts.

So [as a nonprofit] you can't not work with the city and you can't charge them a special price. And so to some degree, the nonprofits are reliant on the City to treat them fairly. That's just the structure of the situation. 

Jamie: I hear you on number two, and I totally agree with you: there is that number two. You would like to price your services so that you could put a cushion against the fact that you're gonna be stuck waiting for the City to pay you back, and you basically can't. But John, how does a nonprofit that decides to do business with the City — because it has to — keep mind and body together? You're describing a situation that dooms you to penury. 

John: The truth is I've never met a non profit doing social service that has built up an adequate cushion the old fashioned way. I've never heard anyone say, “Through good management over 50 years, we put away 10 percent a year, nine years out of 10 and, and that cushion helps us in the COVID year or the financial crisis year, and it gives us the earnings to handle these cashflow problems.”

Jamie: But to be careful, you're not saying that nonprofits are not well managed. In fact some of them are phenomenally managed. 

John: No. Yeah. It's impossible. The ones who have a cushion, it truly was an act of God. 

Jamie: Totally agree. 

John: Probably they got a bequest of a building in that crappy area that's now called Chelsea. 

Jamie: Right. Well, Children’s Aid.

John: Right. Look at Stanley Richards. Great guy on my board. CEO of the Fortune Society. A better manager cannot be found. A more serious man cannot be found. If he didn't have MacKenzie Scott money — which was, if not an act of God, a windfall — he (and he's been public about this) wouldn't have been able to survive some of the cashflow strains they've had from late payment.

Jamie: You mentioned Sister Paulette, and I can think of a few others: there is a class of managers of nonprofits, and they're often founders, who are great at getting government money. I don't mean grant money. I mean, contract money. They have a look in their eyes. They're killers. They're assassins. Just like in the business world, you have assassins who know where to go to find money. Or they have a nose, like a truffle pig, for figuring out where the next program is and crafting themselves into the RFP that goes out to solicit for it and winning it over and over and over again.

John: I agree. The other thing I would say is, as you know, most of these contracts are expense reimbursement for people. There’s a whole art to saying, “I have one Jamie Rubin, and I have nine contracts I can allocate him to, and so I'm going to put them on this contract now. But if that contract goes away, I'll put them on this contract.”

Having a sort of diversified organization with a good enough accounting program to realize that on Thursday, Jamie's no longer billable to the ACS contract three, but you can move them on to DOE 17.B-four… That is super important. A lot of smaller groups who've just gotten started don't understand that. 

Jamie: I was chairman of the board of the Osborne Association, which is a mid-size nonprofit. They perform phenomenal services. Relatively sophisticated, but nothing close to the ability to manage that kind of system, and it was really a problem. I don't know that you have a real good estimate of this, but at one point I heard estimates that [the city was] anywhere from $1 billion to $2 billion of really late payment.

John: It's very hard to tell for deeply nerdy reasons that I won't go into, but I think $1 billion is — it's been $1 billion at times, for sure. 

Jamie: And that's just the city, by the way. A lot of these folks have state contracts as well.

John: Right. 

Jamie: There's always the question of why does this happen? I think partially the answer is what you said, which is a reaction to fear of corruption and fear of all kinds of other stuff and a desire to do things “the right way,” which makes total sense until it gets carried away. My own view for what it's worth is that it is a little bit the City using the nonprofit sector as a credit card. It has to be. 

John: Of course. Well, only once in the immediate aftermath of COVID did I get any sense that the City was explicitly and consciously hoarding cash by not paying nonprofits. I have never got that sense. I wouldn't say credit card. I would say, I don't know, punching bag or buffer. 

For example, we'll go all John Kenneth Galbraith and theory of countervailing power: the nonprofits don't have power. They don't have unions, by and large, that are strong. I think that it's not so much that the city's sort of abusing them actively, but there's only so much time in the day to do stuff. I think it's easy for the nonprofits to come last because their collective power is very weak.

Jamie: So the end of the story is there's been a bit of progress. I don't think there's been any great progress in terms of just fixing this late payment problem, I don't think any nonprofit would say. It's highly expensive, it drives some of the amount of business, it leads to things like credit lines. The idea that a mid-sized nonprofit has a $5 million credit line with JPMorgan is insanity, but that's where we are.

So the question, John, is, absent a massive change on the part of government, is there anything creative that the private world can do to try to at least get in the way of some of this? 

John: If the city can't pay on time, it should lend the money to the nonprofits that are waiting to get paid at very low interest. It doesn't need to do that dollar for dollar. I think that if the city were creative, they could say, “You know what, instead of plunking $50 million more in the returnable grant fund, why don't we take a first loss position, because maybe some sharp penciled people will convince themselves that if there's $50 million of first loss from the city, that will support — I'm just making this up — that'll support $200 million of loan capital from the private sector (foundations and the like). I think the City could play a role in partnership with private, probably, philanthropy in growing a fund that could help lend to nonprofits who are waiting to get paid.

They do some of that, but they don't do enough. My experience, just for what it's worth, is that zero is a magic number. There are people who are willing as part of their philanthropic mindset to make capital available, as long as they're really quite sure they'll get it back. They're not looking for a return.

And then you can say as a finance guy, “but that's not rational, get it back on a real basis. Are you adjusting for inflation? What about risk?” They just think, look, “if I put up half a million bucks, because of this first loss from the city or whatever, I'm really highly likely to get it back, and it will support either particular organizations I love or a class of organizations I love.”

I think people will do that. I think the world's very hard; running a nonprofit is very hard. The analogy for nonprofits is not to Fortune 500s. It's to family businesses; it's to small businesses. A lot of the thinking that Fortune 500-types say, “ah, you see, it's because they're a nonprofit that they care about the people.” There's a lot of stuff, which I think people think of as a for-profit/nonprofit difference, but it's really a small organization/big business difference. 

Jamie: Totally agree. John, in our last couple of minutes, let me ask you a couple of questions. First of all, we both, as I said, violently agree that the nonprofit sector is far from being oversized, or somehow fat — it serves a vital purpose. What can people do to keep the nonprofit sector running well and growing? 

John: Get involved! If you're a New Yorker and you've got something — time expertise, money, all of the above — get involved. For the nonprofits that you are involved with, take your involvement seriously.

Jamie: John, this is great. You're a great friend of the sector and it's been great to talk to you.

John: Jamie. Thank you so much. 

Jamie: Thank you, my friend.

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Jamie: I loved talking to John MacIntosh. Here are my three takeaways from our conversation. 

The first is political power. John and I are both totally mystified about why it is that the nonprofits have to sit and take it from the City and the State without pushing back with political power? There's 46,000 nonprofits in New York City if you count churches and schools. Most of them get some kind of funding from the City. The raw numbers would tell you that they should be able to exercise political power, so what is the problem? The answer, I think, is partly that nobody's ever really tried and that's changing. I think also there's something in the nature of nonprofits themselves. There's lots of small nonprofits. A lot of them serve very niche audiences and do kind of specialized things, and they kind of think “well I don't have anybody who's really like me; there's nobody I can band up with if I have some complaint to make.” While that is absolutely true at the local level, the fact is they share a few serious issues that are common to all the nonprofits.

[A major one is] how do I get paid on time by the City and the State? That is a shared problem across the entire nonprofit sector. If they all get together, they've got real power. I think it's just a matter of making that happen. 

Number two: solutions. The number one solution, of course, is for the City and State to get their act together and start paying everybody on time. That's not likely to happen anytime soon, as much as we would like to hope that would. There's other solutions that come from the financial sector. For example, bridge funding. If the city is not going to pay everybody on time, they should offer to bridge the time to their own payment. They could say, “Look, I know it's gonna take us a while because of our own processes. We have a 0% interest fund. We'll lend you the money against that contract that's going to start in six months. You can just pay it back to us with zero interest as soon as we start funding you.” Something like that could be provided by the private sector, or the foundation world — the philanthropic sector.

There are revolving loan funds that exist to fill in the gaps that are created by the City and State's slow funding. Unfortunately, they're just much too small. We've talked about billions of dollars, and there's no foundation that's going to commit that kind of funding. They could be bigger. The banks that have their own, for example, Community Reinvestment Act obligations can say, “look, this is one of the ways we're going to commit to solving problems.” The City can help there, too. Why couldn't the city say, “look, we'll provide the most risky part of this capital for a revolving loan fund, the first loss guarantee. In six months, we're going to start paying these out again.”

Is it efficient? No. But at least it would be the City recognizing that it's creating a problem. 

The final point, number three, that John and I talked about is that nonprofits are absolutely critical to the health and success of New York City, and everyone should be involved in some way. Nonprofits are delighted to hear from you, but you have to figure out a way to find the one that's right for you, and that can be overwhelming and very challenging.

My approach, and this is just one of many, would be to think about the scale you want to be engaged at. I would say, if you've got the time and energy, pick something local and pick something a little larger. Local could be literally on your block. Something larger could be something citywide, it could be something federal, maybe it's something from Manhattan or the Bronx.

But pick two things, edge into it, but pick ultimately two things at two different levels, because it gives you different perspectives. And they give you different kinds of satisfaction, frankly. 

So then what do you do? Well, it can be a little intimidating. Everybody's got a website these days, so that's great. Go to the website. Don't click on the Donate Now button, click on the button that says, “I'd like to volunteer,” and then see who talks to you. Or, if you want to be even more aggressive, hit the Contact Us thing, and talk to the executive director. They're always happy to hear from people who want to help them out.

Thanks so much for listening. We'll be back soon with another episode of After Hours with Jamie Rubin.