NSW Local Government Minister Don Page says expected "Rivers of Gold" will turn into "Rivers of Tears" if the federal government funds councils following the proposed September 14 referendum.
If Parliament approves a bill to hold the referendum, voters at the federal election will be asked if local government should be recognised in the Australian Constitution.
This would see federal government funding come direct to councils, instead of going through state governments who currently distribute money, including Commonwealth Financial Assistance Grants and Roads to Recovery funding.
Mr Page said the NSW cabinet could see few advantages in councils receiving money direct, as the funding model would change.
"Some people in the local government sector wrongly assume that if funding comes direct that they will get more money," he said.
Mr Page cited research from Sydney University Constitutional Law Professor Anne Twomey that showed moving away from the current population-dependent per-capita grants to an equalisation funding model would impact more populated states.
"The impact of that is the smaller states are subsidised by the bigger states when you go to fiscal equalisation," Mr Page said.
"Professor Twomey makes the point that NSW and Victoria will be significantly disadvantaged so the local government sector in those states would receive less money in financial assistance grants.
"Professor Twomey says those rivers of gold will turn into rivers of tears when the model changes. As minister for Local Government the last thing I want to see is the local government sector of NSW getting less money as a result of the change."
Mr Page said he also feared, based on Prof Twomey's comments, the administration cost of distributing funding, currently absorbed by the states, would come out of Commonwealth coffers.
Lismore Mayor Jenny Dowell said her understanding was recognising local government in the constitution would not result in reduced funding, but prevent constitutional high court challenges over funding.
Cr Dowell said it was really disappointing that the NSW Government seemed to backtracking from their initial support for the referendum.
Ballina Mayor David Wright said he supported the referendum.
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