The freeze was announced in Tuesday's federal budget and Wollongong Lord Mayor Gordon Bradbery said the decision would cost his council $3 million over the next three years.

Kiama Mayor Brian Petschler said the Kiama council already had long-standing concerns over the formula used to calculate the grants, but said the latest freeze was part of a "death by a thousand cuts" process.

"It pushes the need for lower levels of government to raise taxes rather than the federal government," Cr Petschler said.

He said under the "complex formula" used to determine the grants, Kiama Municipal Council regularly fell in "an above average" category on most issues, which impacted on the value of grants the council received.

However, Cr Petschler said the federal grants were still a major source of income for his council and there were concerns it would lose funds through the freeze.

Shellharbour City Council general manager Michael Willis said he understood the way the grants were allocated could be a dynamic thing with variations that changed year to year.

"However, the bottom line is the total pool will shrink in real terms," Mr Willis said.

"My major concern is what we have allowed for in this year's budget which is currently on exhibition, but is still in a draft stage and we are yet to see the detail."