A bankrupt county council siphoned off £9 million meant for school improvements in a desperate bid to prop up its depleted reserves, it has been revealed.

Northamptonshire county council hit the headlines in February after its bank balance plummeted so low that it was forced to bring in what’s called a Section 114 notice, banning all new spending.

But the revelation that it had diverted funding meant for schools towards other costs has prompted warnings that other authorities could do the same.

The council’s grip on its finances has since been the subject of several investigations, and the Huffington Post reported this week that it moved the £9 million into its general revenue account last year.

An external audit report by KPMG into the council’s finances in 2016-17 revealed in August last year that it had delved into its reserves in an attempt to keep afloat, including funds raised through “Section 106” payments from housing developers, which are meant to fund community projects and local services.

The size of the cuts councils are having to make is simply too big to be plugged by reserves

The report said “mitigations” made by the council included “£9 million of S106 developer contributions set aside to fund future educational improvements within the county”.

S106 agreements are legal obligations with developers which aim to balance out pressures created by new developments with improvements to the local area, and include a variety of infrastructure including schools.

According to the audit report, the £9 million will be “refinanced through council borrowing”.

A spokesperson for Northamptonshire county council insisted the Huffington Post story was incorrect until Schools Week provided a copy of the KPMG report.

She then claimed the council has governance measures in place to “ensure agreed investment for infrastructure is made in full and in a timely basis”. This covers both the council’s S106 obligations and its capital projects for schools.

Don Peebles, from the Chartered Institute of Public Finance and Accountancy, warned that Northamptonshire “is ultimately unlikely to be a unique or isolated case”.

“The whole sector faces pressure owing to cuts, funding pressures and service demands, and could face a £5 billion funding gap by 2020.

“It’s a task for the government to work with councils to ensure finances are sustainable, but it is also down to local authorities to keep a check on their medium term financial planning, to have in place robust governance and financial oversight, and also to heed the advice of outside experts.”

The Local Government Association is concerned that councils across the country are having to divert “ever-dwindling resources” from other local services in an attempt to plug “growing funding gaps in adult social care and children’s services”.

“Reserves are designed to help councils manage growing financial risks to local services and do nothing to address the systemic underfunding that they face,” a spokesperson said. “The size of the cuts councils are having to make is simply too big to be plugged by reserves.”

31.7 per cent of local authorities now see funding education and children’s services as their greatest immediate pressure, up from 6.8 per cent last year according to a report released by local democracy think-tank LGiU and The Municipal Journal in February.