There's also issues when the watched are funding the watches. If the council funds the newspaper, then the newspaper reports badly on the council, then the council can reducing funding for the newspaper.

You need it to be independent, so how can you fund it. Perhaps a separate precept on the council tax bill which is set separately (say by national government)

The BBC funding model attempts to do this at a national level, but of course nowadays that's not sustainable - part of the failure of the old civic minded establishment in favour of the new edgy profit minded establishment