Finance Minister Grant Robertson announced the review at Local Government New Zealand's annual conference in Christchurch.
LGNZ president, and Dunedin Mayor, Dave Cull says the current way of funding local government does not provide the means to invest for growth and development, particularly given the diverse challenges facing communities.
Regions, cities and districts should not be entirely dependent on central government to resolve the complex issues now being faced. It is essential local authorities are empowered with access to funding and financing tools to make a difference, he says.
There is already evidence of local authorities being empowered to access the funding Mr Cull craves. Auckland Mayor Phil Goff has imposed a petrol tax on his city, on top of the tax which the rest of New Zealand may pay - ranging from 9c to 12c a litre.
Aucklanders are now paying 11.5c per litre more for their petrol, taking it close to what South Island motorists have been paying for years. They may also face a toilet pan tax to pay for a $1billion sewer tunnel.
Auckland is close to its debt ceiling. No doubt there are other local authorities within reach of having to sell assets rather than borrow against their value.
The coalition Government has highlighted its determination to help local government address the varied increasing cost pressure councils have faced.
Since the 2007 Shand Report into local government rates, local government cost pressures have grown significantly and by more than other costs faced by ratepayers.
Mr Robertson says the pressures faced by councils vary significantly, whether it is the provision of infrastructure due to growing resident populations, or provision of tourism infrastructure against decreasing rate bases.
This frankly is a direction to the Productivity Commission to open the door in its recommendations to allow councils to charge their residents more - perhaps not by direct rate increases but through raising money through different means.
Current structures are apparently not fit for purpose and the Government says it can help by cutting red tape, and taking pressure off local government.
Businesses will be forgiven for reading the last sentence with a huge amount of cynicism. They, like many New Zealanders, have lost count of how many reviews the Government has implemented since it took office. Almost no policy can be implemented, it seems, without a wide-ranging and in-depth review.
However, it is the review of local government funding which must ring alarm bells for ratepayers who may face increasing costs from less than frugal councils.
Research institute the New Zealand Initiative has been caught up in ''Project Localism'' with LGNZ in a plan for the devolution and decentralisation in the way New Zealand is run.
Mr Cull says New Zealand is among the most centralised countries in the world. Centralised countries tend to be less wealthy and have lower standards of living and we should not expect central government to be the best decision-maker for every local problem.
In this, the Dunedin Mayor is correct. Communities often have the best solutions. The danger is the communities are often ignored where the votes count less than those in more influential areas.
Local government costs have significantly outpaced inflation and no council report has yet adequately explained why. Inflation for the year ended June was 1.5% and is likely to stay below the Reserve Bank's 2% mid-point for longer than expected.
In Dunedin, the council this year approved a rate rise of nearly 8%. Giving the council access to other forms of funding will be no guarantee rates will fall, leaving residents with increasing taxes without proper representation.
