Two long-time Wollongong homelessness services will be defunded and left to close from October, when government dollars are diverted to bigger operations.
In a long-awaited decision, Family and Community Services announced on Friday that homelessness funding in the Illawarra-Shoalhaven would be given to just seven providers.
Another three - Wollongong Emergency Family Housing; Wollongong Women's Housing and Shoalhaven Youth Accommodation - will be left to fold.
The new arrangements are part of the state's "Going Home, Staying Home" reform of specialist homelessness services, which will reduce from 336 to 149 the number of services offered across NSW.
'There is disbelief and a sense of unreality. I've only just stopped shaking.'
According to Family and Community Services (FACS), the new system comes with a region-wide funding rise of 18 per cent ($1.04 million), though providers the Mercury consulted have challenged this.
Wollongong Emergency Family Housing has operated for 29 years on minimal funding - most recently an annual budget of $260,000.
Manager Julie Mitchell said her eight staff had reacted with shock to Friday's announcement, in which St Vincent de Paul Society NSW was declared "preferred provider" over her own operation.
"It's very much like we're going through the process of a death," Ms Mitchell said.
"There is disbelief and a sense of unreality. I've only just stopped shaking."
Under the new arrangements, St Vincent de Paul Society NSW will take responsibility for a single, centralised Illawarra service aiming to link adults and families to other area support services.
It will also run housing stock previously operated by Wollongong Emergency Family Housing.
Ms Mitchell questioned whether a bigger organisation would provide the same level of service.
"Because we were a small organisation we were able to respond very quickly," she said.
"We were very much in touch with what the homeless population of Wollongong needed. Our workers have years and years of experience, and were highly skilled."
Under the reforms, homelessness services in the region have been split into nine "service packages" according to their location (Illawarra or Shoalhaven) and likely clientele (such as youth, family, women).
Wollongong Women's Refuge and Warilla Women's Refuge will formally amalgamate for the service package covering women and domestic violence.
It will be called Supported Accommodation and Homelessness Services Shoalhaven Illawarra, and will take over some of the operations and housing stock of Wollongong Women's Housing, another unsuccessful provider.
Wollongong Women's Housing manager Loekie Klevjer said the decision had "devastated" her staff, who met after Friday's announcement, some of them in tears.
"We've had literally thousands of families come through here. It's been a solid organisation with great outcomes.
"The government has changed the way they want to organise homelessness organisations, and the small organisations are no longer their preferred option for doing that.
"I hope they're not throwing out the baby with the bathwater. These little organisations have so much local knowledge."
Several area providers contacted by the Mercury challenged the government's claim that the new arrangements would boost funding to the region's homelessness services to $6.98 million.
The state government did not contribute its half of $2 million in National Partnership Agreement on Homelessness funding, meaning the federal government's half would also be withheld, making the region about $1 million worse off, they argue.
Questioned on this, a FACS spokesman said: "The National Partnership Agreement on Homelessness funding is separate, and is subject to ongoing discussions with the Australian government".
The spokesman said the department had contracted Jobs Australia to run employment initiatives aimed at retaining experienced and specialist staff in the new system.
Statewide, more than half of new providers were deemed "small" and preferred providers demonstrated strong capability, he said.
"Considerable assistance was provided to existing providers, especially small and Aboriginal providers, to help them to reform and to position themselves in the new service system."