The region's councils are about to have holes punched in their budgets, which could see playground upgrades, roadworks and other projects put on hold.
The issue is related to the emergency services levy, 73.7 per cent of which is paid by insurance companies, 11.7 per cent by councils and 14.6 per cent from the state government.
Since the levy's introduction in 2017, the state government has had an informal deal that it would pay the annual rise in the levy for councils.
A spokesman for Customer Services Minister Jihad Dib said the payment of levy increases was only ever "ad-hoc" and never budgeted for.
The government has sent out each council's notice of assessment, which includes the unbudgeted shock of having to pay the full amount.
Across the board, the amount councils will pay has jumped $76 million compared to the $143 million paid during the last financial year.
A spokeswoman for Wollongong City Council said it would have to pay $6.1 million this coming financial year - a rise of $2.1 million on previous payments.
Shellharbour City Council will pay an extra $310,000 this coming financial year.
While Wollongong City Council has some reserved funds to pay the unexpected bill, the financially-strapped Kiama Municipal Council may have to axe some projects to find the funds.
Wollongong Lord Mayor Gordon Bradbery said its council reserves were fast being depleted in the wake of COVID, recent rain events and "the runaway cost of labour and materials".
The Lord Mayor branded the government's move as "another bit of cost-shifting".
"It gets the state government off the hook in a way, there is a service managed by the state and yet each council is then lumbered with the cost," Cr Bradbery said.
The timing didn't sit well with Cr Bradbery either - Wollongong City Council has already drawn up its draft budget for 2023-24.
"It's a bit late introducing it now when we should have had a longer period of preparation to take this on board," he said.
"Most of us are preparing our budgets for '23-'24 now, ours is out on exhibition. It's a major impost and we've got to take this onboard with a very limited rate cap of 3.7 per cent.
"I would ask the state government to delay [this] to allow local government to take this into consideration for future years, if they want to pursue this."
Shellharbour City Mayor Chris Homer said the levy payment would eat up 15 per cent of its approved 3.7 per cent rate rise.
"This significant increase is inconsistent with the expectations of local government in keeping costs to a minimum within the current rate cap," Cr Homer said.
"This is cost-shifting onto local government, without a subsidy, while council rates have been capped to pay for a government service. This will make it very difficult for local government to deliver services and facilities in the current environment."
Local Government NSW President Darriea Turley said the change in policy would see the approved rate rise of some councils largely eaten up by the extra levy payment.
"This is an alarming development coming late in the council budgeting cycle and well after the IPART's rates determination for 2023-24," Cr Turley said.
"The effect will leave some councils with insufficient funds to cover cost increases in other areas. These costs will need to be met by cuts to staff and services."
Kiama council was also contacted for comment but had yet to be formally notified by the Office of Local Government.
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