ONLY one-third of NSW's councils have been deemed fit for the future as the government eyes off a $2billion windfall from mergers.
IPART's review of every local government in the state told a sorry story for several North Coast councils - Tweed, Kyogle, Tenterfield, Clarence Valley and Bellingen all failing to make the cut.
The figures were better for Lismore, Byron, Ballina, Richmond Valley, Coffs Harbour and Nambucca, who all made the grade.
The report found local government mergers in Sydney could free up almost $2billion of ratepayers' money over the next two decades.
"With 60% of councils not fit for the future, this IPART report shows the situation is now critical and that action is needed to ensure ratepayers get value for money and the services and infrastructure they deserve," Premier Mike Baird said.
"For many councils this is a final opportunity to do the right thing for the future of their communities, which in many cases may include merging with neighbouring councils."
Sydney councils were the worst performers, with 71% found to be financially unviable under their current systems.
Councils in the state's regions fared somewhat better with only 56% falling below the grade.
Local Government Minister Paul Toole attributed the poor showing to councils "resisting change" and proposing rate increases to boost their performance rather than nominating for mergers.
Thirty-two councils proposed a rate rise to get fit, with 15 councils proposing rises of more than 30%.
Only four of the state's 152 councils put their hand up for voluntary amalgamation and the range of financial incentives the government had offered.
Mr Toole announced a new Stronger Communities Fund, providing each new council up to $15million for infrastructure projects and up to $10million so ratepayers were not slugged with the up-front costs of the amalgamation.
But concerns were raised over the methodology used in the review, with 93% of councils deemed to be financially sustainable but still unfit for the future.
Independent MP Alex Greenwich accused the government of imposing an "arbitrary population minimum which most councils, including the (Sydney) City, cannot meet, forcing IPART to deliver an 'unfit' stamp".
Greens MP David Shoebridge said every non-Coalition member of parliament opposed mandatory mergers and there was "no political majority to force amalgamations through".