Terry McArthur of the Pheasant Rump Nakota First Nation was sentenced last week to nine months in jail after pleading guilty earlier this year to inappropriately touching a 16-year-old girl.
He remains free in a nearby community while he appeals the sentence.
The band council said this week that it had agreed to pay McArthur for the remainder of his term plus severance — nearly $48,000.
Aboriginal Affairs Canada criticized the decision and urged the First Nation to reconsider.
Gaylene McArthur says she and her fellow councillors changed their minds about the severance after looking at the band's books.
"We thought we could afford it," she said Thursday. "Now, looking back at our finances right now, this is something that we cannot afford and we have already stated that we will not be paying him severance."
Gaylene McArthur, who is not related to the former chief, also said the band hasn't paid any of his legal bills.
"We did not put any dollars towards any part of former chief Terrence McArthur's court case, either be it lawyer, bail or whatever ... and our books will prove it ... when we release our audit for 2014."
McArthur had refused repeated demands from community members to step down as chief after he pleaded guilty in May. He submitted his resignation July 30. Gaylene McArthur said the band held off announcing his resignation on the advice of legal counsel.
Some band members are not happy about how the band's leadership has dealt with the matter. A handful of residents gathered outside the administration office Thursday with letters demanding that all the councillors resign.
Coun. Kathleen Bourne warned such a move could hurt the First Nation and stall progress that has been made with the federal government on new housing.
"It's a possibility that because there (would be) no governing body on the First Nation that Aboriginal Affairs ... could step in and put it in third-party management," Bourne said.
"That means that all our progress that we have made so far will stop. There will be no other services except essential social assistance," added Gaylene McArthur.
The councillors added that the small group of protesters, who represent about 40 people, don't represent the majority's feelings about the 400-member band's operations.
A byelection to fill the former chief's position must be held by the end of October under band rules.
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