The NSW government is not ruling out forcing local councils to merge, but hopes funding sweeteners will be enough to convince them to amalgamate.
Premier Mike Baird on Wednesday committed $258 million in incentives for the state's 152 councils to merge.
Councils in the Greater Sydney area could get up to $22.5 million each for merging, while country councils could get up to $13.5 million.
Mr Baird says more than a third of the state's councils are facing financial problems and will need help to join forces with neighbouring councils.
"Clearly there needs to be less councils," he told reporters in Sydney.
Mr Baird was asked if he would consider changing former premier Barry O'Farrell's policy of not forcing councils to merge should his funding plan not be widely taken up.
"If we get to the end of the process and councils aren't there and they're not fit for the future, well we have to consider what options we can work with with them," he said.
"Because it is clear that the current position is not sustainable."
Mr Baird was also asked if the amalgamations might lead to job cuts.
"I expect as part of this process there will be less people picking up pencils and more people fixing up local roads," he said.
The NSW government is also offering councils cheaper loans, which it says could save them up to $600 million, and reductions in red tape - estimated to save up to $100 million.
Mr Baird says the reforms will help councils reduce rates and deliver much-needed infrastructure.
Councils will have until June 2015 to decide if they will merge and take up the government funding.
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