He stated this during an interactive session after delivering his keynote address at the maiden International Conference on Politics, Security and Development held at the Babcock University, Ilisan-Remo, Ogun State.
Obasanjo accused the governors of stealing council funds thereby endangering the development and growth of the councils.
He said once the Local Government Allocations are released from the federal account, the state governments deduct a substantial sum from it, and spend the remaining on shoddy programmes to cover up the fraud.
The former president said that no Local Government chairman had the effrontery to challenge the illegal deduction.
According to him, he initiated the local government reforms in 1976 to make the LGs autonomous, functional and developmental, but the governors have impaired the functionality of the councils with their lack of integrity.
"An effective, efficient and performing local governments system and operation will enhance the delivery of dividends of democracy and governance in Nigeria," Obasanjo said at the conference themed, "Forty years of Local Government Reforms and Democratic Development in Nigeria: Critical Perspectives,".
"Not allowing local governments to work and stealing their funds from source by states is one of the greatest disservices of all political parties in the present dispensation of our democratic experiment.
"In fact, experiences in many states of the federation have shown that local government administrations have become the most constitutionally-abused matter in the country since the 1999 Constitution became operational. Only a handful of states had held local governments’ election.
"Others have carried on as if it is legal to run local governments without the constitution that created them.
"Most state governors floated the idea of appointing transition committees comprising of their surrogates to oversee the affairs of the councils. The trend, sadly, has been maintained in some states till now.
"In others where the polls had been conducted, the governors, in connivance with corrupt electoral officials subservient to the governors and the ruling party committed malpractices which make a mockery of the process," he lamented.
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In his address, the Ogun State Governor, Ibikunle Amosun, who was represented by the Secretary to the State Government, Adeoluwa Taiwo, cleared himself from Obasanjo's allegations.
Amosun said, on the contrary, his administration never took from the Local Governments' funds but rather on several occasions gave out complimentary funds to the councils so that they can meet their financial obligations.
He said his administration recognises the constitutional provision of the local government which was why it ensured council elections were held twice in 2012 and 2016.