Local Government New Zealand has released the first part of a report addressing funding shortfalls in local government.

The discussion paper details the findings of a major funding review that started last year.

President Lawrence Yule says councils spend around 10.5 percent of all public expenditure, but only raise 8.3 percent of public revenue.

He says a growing number of councils face financial challenges - as demand for infrastructure and services rise.

One of the solutions it's proposing includes co-funding on projects that have significant local and national benefit.