Mrs Bennett said council wages and salaries had increased 2.3 per cent in the year to March - higher than the rate of inflation and central government and private sector wages.
She also cited the findings of the latest LGNZ survey, which showed that councils were rates poorly on trust, value for dollars spent, and managing finances.
"I expect you to look closely at your costs and have free and frank conversations about what is driving your expenditure and whether that discretionary spend is assisting your council to achieve its strategic goals."
Earlier today the Local Government NZ said that Councils should be free to set road user charges and fuel taxes, charge tourists and receive a share of royalties from mining.
A ten-point plan has been released by the organisation after its year-long review of local government funding, and contains some radical suggestions.
President Lawrence Yule said the document was designed to spark conversation about how councils could be funded.
"We are launching this plan because local government is facing unprecedented economic and demographic change and increasing community and government expectations," Mr Yule said.
Property rates should remain the cornerstone of funding, Mr Yule said, but other possible revenue sources were needed.
Funding has been a source of tension between some councils and central government.
In April, Auckland Mayor Len Brown's suggestion that motorway tolls could be implemented to help fund the additional $12 billion in transport infrastructure the city needs was flatly rejected by Transport Minister Simon Bridges.
How infrastructure for Auckland special housing areas should be paid for has also been debated.
Transport Minister Simon Bridges reiterated this morning that giving councils power to set motorway tolls and road user charges were "not Government's preferred options at all.
"Never say never but as we look at Auckland, for example, we've been very clear that good strategy is required first on transport issues before we think about funding tools and funding mechanisms."
Local Government NZ represents the country's 78 local and regional authorities, and is currently holding its annual conference in Rotorua.
Its 10 proposals are:
• Agree upon an action plan to advance "special zones" for growth.
• A cost benefit analysis and agreed sharing of cost with central government should accompany any project or cost that has been imposed by Wellington.
• Mandatory rating exemptions should be removed - potentially allowing the charging of rates against Crown-owned properties.
• Simplify the rates rebate scheme.
• Better guidance is needed to assist councils to make decisions on whether to fund services from prices (user charges) or taxes.
• Road user charges, targeted levies and fuel taxes should be allowed where it is economically efficient.
• Councils should be able to get a share of any additional economic activity related to local intervention and investment.
• Local authorities should receive a proportion of any mineral royalties attributed to local activities.
• Allow councils to levy specific charges and taxes on visitors where economically efficient.
• Reconsider the decision to limit the range of community amenities funded through development contributions.
The issue of whether rates should be charged on Crown-owned properties was the subject of a remit passed earlier by LGNZ members, including Auckland Council.
In response, Local Government Minister Paula Bennett said the Crown paid full rates on a number of properties, but there were no plans to review exemptions on facilities such as schools and hospitals.
LGNZ's members also supported a proposal to request the Government to ban smoking outside cafes, restaurants and bars.
Lighting up inside hospitality and other workplaces was banned in 2003, and any push to extend that to ventilated outdoor areas would be controversial.
However, about 70 per cent of councils at the conference have voted to ask for a ban on smoking outside cafes, bars and restaurants.
The Maori Party has a policy to make New Zealand smokefree by 2025 and since gaining power in 2008, the National-led Government has overseen steep increases in tobacco taxes, restricted the display of tobacco in shops, cut duty-free allowances and introduced plain-packaging legislation.
A spokeswoman for Associate Health Minister Sam Lotu-Iiga referred questions to the Ministry of Health, which in a statement said it encouraged businesses to consider going smokefree, "especially those restaurants and cafes where children and families are present".
