A Discussion with Living Cities’ Marian Urquilla and Robin Hacke about integrating program and Capital through The Integration Initiative.

Six months into my tenure as a Program Manager at Living Cities, and nearly a year after the Initiative’s public launch, I realized that there were a lot of things I didn’t know about The Integration Initiative.

Sure, I knew The Integration Initiative was an effort designed to support cities that are harnessing existing momentum and leadership for change, overhauling long obsolete systems and fundamentally reshaping their communities and policies to meet the needs of low-income residents. And I also knew that over three years, five sites—Baltimore, Cleveland, Detroit, Newark, and Minneapolis-St. Paul– are receiving an investment of $85 million in grants, flexible debt, and commercial debt from Living Cities and its members.

But, I didn’t know how the strategy for The Integration Initiative was created, or where the impetus for some of its key ideas came from. So, with a list of questions and tape recorder in hand, I went directly to the source. I sat down with Living Cities’ staff leads on The Integration Initiative, Marian Urquilla, Director of Program Strategies and Robin Hacke, Director of Capital Formation. I wanted to find out how they thought about the strategy for The Integration Initiative, what they’re learning from the first year of the effort, and how the reality of driving private markets to work on behalf of low-income people compares to what they expected.

I started with what I thought was a softball question—how did The Integration Initiative come about?

In response I was asked to visualize a puzzle. Marian described, “If you think about building a puzzle from the corners, which is how I do it, the first corner [of The Integration Initiative] was around lending capital.” In my first six months at Living Cities, I’d come to understand that traditionally, place-based efforts to connect low-income people to economic opportunity have relied on grants and program-related investments (PRIs) to do their work—namely building housing and delivering wrap-around services. Recognizing that this approach has not connected low-income people to opportunity en masse, Living Cities designed The Integration Initiative’s funding structure to test how combining grants and PRIs with private capital can scale different types of place-based efforts—with a focus on changing systems to benefit low-income people in diverse urban markets.

Robin added the second corner of the puzzle: “the second imperative was making the capital follow the program, and not be its own thing.” The status quo in community development has long been that practitioners focused on capital have not been involved in program development, and often are called upon after the strategy is fully formed. The commitment to disrupting this status quo was reinforced in The Integration Initiative by the requirement that sites integrate capital and program work, staff and leadership from planning through implementation.

Robin and Marian identified the third corner of The Integration Initiative puzzle as “letting the sites define the issues affecting low-income people to be focused on,” which is why each Integration Initiative site has a different organizing strategy—from workforce in Baltimore to equitable transit-oriented development in Minneapolis-St. Paul. The final corner of the puzzle reflected the aspiration to achieve collective impact, “the commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem.” In The Integration Initiative, we often refer to this as the “one table” approach.

These puzzle corners helped me understand the key ideas that informed The Integration Initiative’s development, but I wanted to understand more about how they came together in the puzzle—particularly relating to capital. So, I kept the voice recorder running, and I kept asking Marian and Robin questions.

Alison: How was the idea of integrating program and capital through The Integration Initiative developed?

Robin: It began with Doug Nelson from the Annie E. Casey Foundation early in 2009, saying that we really had to think about the strategy for using debt in Living Cities’ next round [of funding]. So we started brainstorming different ways to increase the value of the debt by tightening the link between our grants and the debt. The Integration Initiative emerged as a way to start using all three kinds of capital [grants, flexible debt and commercial debt] and programmatic tools in the same direction. And then Marian and Living Cities’ President & CEO Ben Hecht started working with members to formulate what the program piece of it was going to be.

Marian: In creating the program piece we asked: where could the money go? What could the money be used for and who could accept it? It was like parallel parking a car into a very tight space. We felt there was a strategic imperative to blend the capital. It’s about the market frame, about moving beyond the idea that the way to make big change is with philanthropic dollars.

Alison: What were your expectations of how the process of integrating program and capital would work?

Marian: I have to say, I really thought that we would “just” make the loans and the Catalyst Fund investments and that would be that. I’d had the experience of working on large-scale development programs, and I thought that the sites’ projects would be defined, elements would need capital to execute them, and we could take it from there.

Robin: And I thought there would be a CDFI (Community Development Financial Institution) in every pot.

Alison: What has surprised you?

Robin: When we were designing who was going to be at the table [for The Integration Initiative site teams], we said, the debt will go to a CDFI or a CDFI-like institution as though those existed everywhere. Nobody said this is not the way it actually works on the ground. Read more about this on The Living Cities Blog.

Marian: I was struck by how far outside of the program conversation the capital and CDFI work was. Outside of affordable housing, they really are two separate worlds. I thought maybe they were cousins. But they have really evolved as two separate worlds. They are lots of interconnections, of course, but they’ve been organized and deployed as two separate worlds.

I was also surprised by the lack of fluency the program people had in dealing with the capital. To actually integrate program and capital, you have to help the program people understand what capital does. I didn’t think we’d have to do that. I was surprised by how much of that needed to be done. Of course, that also means there’s a lot of untapped potential!

Alison: How has this work changed your understanding of the other side of the program-capital divide (of capital for Marian, and of program for Robin)?

Marian: I’ve come to see the capital side as a tool and a framework. It brings a set of constraints with it. The basic decision to be made is do you want to work within those constraints and whether you can accept these constrains as “givens.” For me constraints can be oddly liberating when they are clear. You can say to yourself, here are the parameters, now let’s create within them.

I think for many of the different partners those constraints have been paralyzing at times. I think it’s been hard for some to think creatively given constraints around time, around having to pay back debt. In working with capital, there is risk on both sides. As a borrower, you have to secure the investment, which is something that program people don’t have to do when seeking grants. This shift requires a more rigorous business plan and increases the requirements for responsiveness and accountability.

Robin: For me, that has been a hugely edifying piece of this. The banks are never going to make a lot of money doing this business, so The Integration Initiative – from their point of view – does not have a wonderful financial upside. On the other hand, they can lose all of their money. So, it’s all about protecting the downside. The people who come from the program side are all about the upside, which is not financial upside, it is mission upside.

There’s a big difference between how I interact with mission people and financial people. What’s interesting for me about this whole dialogue is that it’s difficult to have a straightforward financial conversation with people who are driven by other incentives. We’ve said that Marian on her meanest day is nicer than me on my nicest day because it’s different training, a different set of objectives. I’m in there trying to do different things.

Alison: If you were going to do The Integration Initiative again, what would you do differently?

Robin: I think there is a discussion to be had about where tying program and capital together is the most effective. I’m not at all clear that bringing market capital to the most distressed places is where you make the biggest dent, or that the ratio between the grant money and the debt should be the same in every place. Given what we’ve learned, a weak market might need twice as much soft capital as a strong market and the expectations of what can be achieved with that capital are going to be really different from place to place.

Marian: I wish we’d been crystal clear from the beginning that The Integration Initiative is an intervention in the capital absorption system. Maybe given that frame, in some places we might have used a local bank or insurance company, some financial entity that plays a civic leadership role. We still could have put the debt in a CDFI, but we wouldn’t have necessarily assumed that a CDFI leader would [be in the position to exercise] market leadership.

Robin: From the program point of view, the CDFIs were supposed to be the voice of the market. The lenders viewed the CDFIs as a borrower they could underwrite that would be able to put out the money.

Think about when New York City was on the brink of bankruptcy, and the role that my hero Felix Rohatyn played. Business and financial leaders often were civic leaders in a way where at the moment they are not. In some ways, in this initiative, what we’re struggling with is bringing that voice back to the table, and I think we’re doing it through proxies, through CDFIs. If we had been doing this in the 1970s in Cleveland and New York, it would have been easier because the business community was in a different place.

Alison: At this point in the process, what have been your key takeaways?

Marian: Capital absorption turns out to be a core underlying issue. The Integration Initiative ended up being a stress test, an x-ray. Now that this issue is front and center, I think it’s going to force some very interesting innovations.

Robin: For me, the biggest insight has been is that the whole community development field has been set up in a way that is transactional. And that it totally underperforms when it comes to the market-based, large-scale, overarching transformation that we’re talking about. Anybody who has the expertise to use money and structure money is essentially marginalized. They get called in when a transaction is on the table, but otherwise in many places no one talks to them because of how the table is generally set.

I think the capital absorption challenge is the real system challenge, to the extent that we are trying to do something other than simply build housing units. There are a lot of organizations in every city working on different parts of the same problem. But, as long as they are not talking to each other, not working together to innovate and leverage their collective resources, they will not be able to make enduring change. So I think with its warts and limitations, we’re on to the very earliest stages of how you remake the community development system to make more sense.

In the coming months, the team at Living Cities will continue to share what we’re learning as The Integration Initiative unfolds about the integration of program and capital, the capital absorption ecosystem and the community development system in general. We’re excited to share these insights as this work develops, with the caveat that our thinking continues to evolve and these insights represent a specific point in time in complex multi-year work. Keep an eye out for the next post about “Integrating Program and Capital,” where I’ll be talking with the project and capital leads from the Baltimore Integration Partnership about their on-the-ground experiences thus far.

Questions or feedback? Contact agold at livingcities dot org or @AKGold11 on Twitter.