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Yesterday, Stand Children's Services announced its children's villages in Roxburgh and Otaki would close.
It would mean the loss of 31 jobs in Roxburgh, about 6% of its population of about 520.
Stand chief executive Dr Fiona Inkpen said the organisation had been topping up the shortfall in government funding from its own funds for many years but reserves were used up and the organisation would need an extra $3million to keep the villages open.
Dr Inkpen confirmed southern children would be unable to attend the only other South Island Stand village, in Christchurch, as the waiting list was long and only Canterbury children could stay there.
Central Otago Mayor Tim Cadogan said it was a ''desperately sad'' day for the children of the lower South Island.
''Even though I anticipated this news coming today, I still feel physically sick reading it. I've got to admit that when we got all the way to the top [Prime Minister Jacinda Ardern] last week, and got turned down, I didn't see how the village could be saved.''
The closure would be a ''huge blow to Roxburgh'', but he had faith the town would survive.
Clutha Mayor and chairman of Local Government Zone 6 Bryan Cadogan, who played a major role in trying to keep the service, said it would mean the withdrawal of the treatment service for the lower South Island.
''I have contacted other organisations who were supposed to pick up the slack and it was an emphatic 'no' - they're stretched like a violin string.''
Teviot Valley Community Board chairman Raymond Gunn said the closure was a ''huge disappointment'' but he was unsure what it could mean for the town's size.
''It's been a significant employer in the town ... it's job [losses], so there's less spending money in the town ... how many of those are full-time residents in the town is something I don't know.''
During question time in Parliament yesterday, Minister for Social Development and Disability Issues Carmel Sepuloni answered questions from National spokesman for children Alfred Ngaro on behalf of Minister for Children Tracey Martin.
Mr Ngaro asked if the minister agreed with the Clutha and Central Otago mayors, who said no other agencies in the area provided the intensive live-in services for families.
''The mayors' comments ... are made almost on the premise that funding has been cut,'' Ms Sepuloni said. ''I need to assure this House that Stand is still receiving $20million each year to provide intensive wraparound services to children and their families, the same amount of funding that was received under the previous government.''
She said the minister had directed Oranga Tamariki to track the 21 children at any given time who could be referred to the village.
''The children will still receive the services they need through the ministry and through a range of other providers including Stand, Anglican Family Services, Mirror and Presbyterian Support Southern.
''There are still seven existing villages under Stand that continue to operate and provide that therapeutical support.''
Yesterday, the minister began the first of 14 regional hui, where the ministry will talk with providers it contracts for children's services about improved services.
One will be held in Balclutha next Friday for lower South Island providers. - Additional reporting Pam Jones