Policies and funding levels imposed by national government are undermining local government efforts to remain solvent, city managers said on Wednesday.

Releasing the 2013 report on the state of city finances, managers said rapid urbanisation of the poor and economic stagnation meant that a growing number of households could not pay for increasingly expensive municipal services.

This meant that the councils themselves were likely to find themselves in debt, South African Cities Network CEO Sithole Mbanga told a media briefing in Cape Town.

Mbanga said municipalities were therefore obliged to find alternative sources of revenue but would not survive without more help from national treasury.

"Our reading of it is that local government is gravely underfunded by the system," he said.

It received roughly 10% of the national budget "to fund what we think is a very important sphere of government".

"Local government, and I think in particular metropolitan municipalities, have effectively stretched the rand and they cannot be able to do that anymore."

He said the services offered by local government were becoming unaffordable.

"Not because local government is just increasing the prices for those particular services, but the fact that the economy is not growing also implies that there is less money in the pockets of the households, but also businesses are starting to cry foul about the services delivered, at least in terms of cost.

"If we do not find alternative ways of financing local government the municipalities will themselves be trapped at high levels of debt."

Mbanga said Treasury had to accept the fact that poverty had become an "urban issue" and recalibrate the funding division between rural areas and cities, a point underscored by Buffalo City councillor John Badenhorst who said South African cities now resembled Dickensian England.

"We are actually now in the same position in South Africa from a social point of view that England was [in] in the middle of the 19th century when Dickens was writing his stories ... Oliver Twist is nothing more or less than a story about street children," Badenhorst said.

Tshwane councillor and mayoral council member for economic development Subesh Pillay said cities had to change their brief from merely providing services, to tailoring those to stimulate economic development, precisely so that the poor could earn money and join the local tax base.

He conceded that to do so, councils had to rid themselves of concerns that they were corrupt and unable to govern efficiently.

"We must dispense with the governance issues so that then we can get on with the business of shaping the economies of the city."

But Cape Town deputy mayor Ian Neilson said local government found itself hampered on spatial economic planning by national policies on housing and transport.

The city needed densification, but the human settlement department was still building single household structures on cheap land on its outskirts in what he termed "village thinking".

The report singled out local government's rising wage bill as one its main financial challenges, while managers noted that municipalities could do nothing about it because it was determined in a national bargaining process.

In 2010 and 2011, cities' average spending on staff remuneration increased by 15% and 7% above the consumer price index respectively.