Funding for agencies throughout the justice sector, including police, will now be pooled in a contestable account.
For the next fiscal year, $3.8 billion has been allocated to the Justice Sector Fund, covering Votes Attorney-general, Corrections, courts, justice, police and the Serious Fraud Office.
The first public sector cross-agency fund, it was designed to create flexibility, allowing investment in areas which delivered best results, Justice Minister Judith Collins said.
But Mr O'Connor said police would suffer the most of all justice agencies under the new funding regime.
The more crime police solved, the more people were entered into the justice system and the greater operating costs for other agencies such as courts and Corrections, he said.
If those agencies received more from the fund to cover cost increases, police would miss out, Mr O'Connor said.
"That will actually mean police are likely to lose money because there is more competition for what is clearly the same dollar.
"The real fear is it will become a statistics game, and police will ultimately pay for their success," he said.
Most police projects had a long duration and were less likely to show favourable results in the short term, putting police at a disadvantage against other justice agencies vying for government money on an annual basis through the fund, Mr O'Connor said.
"Everyone is going to be focusing on the short-term stuff in order to protect their budgets. That is what happens within departments and it will now happen between departments," he said.
The Government praised its new justice funding flexibility, with savings made in one agency able to be used by another and money not spent in a fiscal year transferable for subsequent projects.
But Mr O'Connor said departments would instead be motivated to use all available funding.
Adding to police woes was the Government's flatlined police appropriation of $1.49 billion for the next fiscal year.
It meant police would be forced to continue cutting costs to accommodate inflationary expenses including wage increases, Mr O'Connor said.
"It's going to be extremely difficult for police to maintain their current level of service. This is the second year in a row the police budget has flatlined and it is quite clear that they are having to absorb increased costs, which is going to be a very big challenge to say the least," he said.
Police were looking at ways to bring in revenue because, despite the public's perception, ticketing revenue was not held by police and instead went into a "general account", he said.
Ultimately, staff were in the firing line when it came to trimming police budgets.
"More than 80% of the police budget is human resource cost, and you don't have to be very clever to realise there are not many places you can take money from.
"In the last year, police have already had to take a considerable amount off budgets and now they are going to be forced with doing the same again.
"You can only take so much before you are doing serious damage," Mr O'Connor said.
Ms Collins said crime reduction and access to justice were government priorities, and the new fund was geared towards both goals.
