The federal government's freeze on Financial Assistance Grants could see The Hills Council miss out on $200,000 a year, a council spokesman said.
He said the losses were expected to be recovered by productivity improvements, but there was a separate question of equity.
"Council has called for a review of the formula used for awarding Financial Assistant Grants for many years," he said. "Council is of the view that grants should be allocated on a per capita basis and that the current system is unfair."
In June 2013, The Hills councillors unanimously backed a plan that would see a new, larger council formed, covering suburbs that currently fall under the boundaries of Hills, Hawkesbury, Hornsby and Parramatta.
"Something needs to be done to make local government more sustainable as an industry," Mayor Michelle Byrne said at the time.
"It's time that local government in NSW realised that this means fewer councils, not more grants and subsidies from the state and federal governments."
Her council received $5.6 million of Financial Assistance Grants in 2013-2014 and budgeted for $5.8 million of grants for the 2014-2015 financial year.
Hornsby Council's spokesman was also concerned by the government's decision not to increase Financial Assistance Grants in line with cost of living and population increases.
He said his council budgeted for a 2.5 per cent increase (about $125,000) for the 2014-15 financial year, "which now will not eventuate".
Hornsby received $4.9 million for the 2013-14 financial year for a range of programs.
Local Government NSW's president Keith Rhoades said NSW councils face a four-year projected shortfall of $287.7 million as it is.
■ Click here to read Local Government NSW president Keith Rhoades' full comments.