The Ministry of Social Development continued to say Relationships Aotearoa was not living within its means, despite knowing it was chronically underfunded.
Relationships Aotearoa was forced to close its doors in June after failing to reach a funding agreement with the Ministry.
But a report leaked to Radio New Zealand shows the Ministry knew its funding did not reflect the true cost of delivering the service.
Relationships Aotearoa's services were funded primarily by the Government, through the Department of Corrections, the Ministry of Justice and the Ministry of Social Development.
But how much money was available for clients varied between agencies and some contracts were underfunded.
An independent report leaked to Radio New Zealand, Transforming Not-For-Profit Services, was prepared for the Ministry of Social Development. It said the Ministry's fee did not reflect the true cost of delivery.
The Ministry's contract expected clients pay part of the cost. But as the report said this put the organisation under constant financial pressure.
"Pursuing client fees from New Zealand's vulnerable, socio-economically disadvantaged population, was and remains problematic. Client fee payments were, and are, lower than required to meet shortfalls that cannot be met by philanthropic funding. On average, outstanding client debts exceed a $100,000 per annum."
Ministry of Social Development deputy chief executive Murray Edridge said he had never seen the report and rejected accusations that the service was underfunded, but conceded it was spending less on counselling than they were.
"The contract was funded appropriately for what we asked of them and consistent with the other organisations the Ministry funds."
Richard Wood, former deputy chief executive at the Ministry of Social Development and Mr Edridge's predecessor, said successive governments had regarded the non-government sector as a source of cheap labour, albeit one that was well organised and professionally qualified.
In 2008 - after years of no increases - the Clark government injected $100 million into the non-government sector, but when it was elected the Key Government cancelled the funding.
"During the same period that they've been in power, they've steadfastly ignored any requests to make cost adjustments to social support contracts, provided by MSD.
"And you can't help but think that this attitude is about punishing NGOS for the 2008 funding boost and using the last seven years to claw it back".
Minister of Social Development Anne Tolley rejected that.
"Well that's just rubbish, I mean we went into a Global Financial Crisis. I mean people have to understand there was no money, it was a really tough time to become government. There was no money."
The Ministry is currently reviewing funding for the non-government sector and said it could not say what that would mean for counselling services in the future.
You can hear more about this on Insight, just after 8am on Sunday Morning with Wallace Chapman.