Powys council's failure to intervene has led to schools overspending by millions putting them "at risk", a critical report has warned.
Schools are predicted to have a deficit of £5.4m by 2019-20, with some not only spending their own budgets but going into council reserves.
A report said the council's reluctance to intervene to stop the growing debt was a "significant weakness".
Councillors met to consider the findings on Friday.
The report, by the council's education scrutiny working group, said the authority had known about the growing deficit for some time but failed to act and the issue was now "very urgent".
It warned that while the council issued letters of concern to offending schools it had been "reluctant to use powers" to directly intervene.
This has been seen as a "weakness" by the schools, which have "sensed that little action would be taken".
'Risk to authority'
The report considered by the audit committee stated the lack of intervention was because the council felt it does not have the skills to manage the problems.
It also said that a "lack of clarity" over who is responsible for what has meant some schools were not only spending their own budget, but were also accessing and overspending the council's non-delegated cash.
This was now "unsustainable" and had become a risk not just to the individual schools but to the overall financial health of the authority, it warned.
The review, which follows concerns raised by the Wales Audit Office in June, also noted that:
- Powys has the highest school transport costs in Wales costing over £9m - the equivalent of £513 per pupil
- Pupil numbers are falling with sixth form students being lost to other counties
- Additional learning and behavioural expenditure costs £4.3m a year - the equivalent of £243 per pupil - the third highest in Wales
- A lack of a consistent policy direction and implementation has led to inaction and delays in school modernisation
- An outstanding decision on a new Welsh medium school in Powys is leading to uncertainty in schools which could face closure
The report issued a stark warning: "This situation cannot continue given the continuing depletion of council reserves and urgent action is required".
Deputy council leader Aled Davies said the council needed to work with schools urgently to address the financial situation.
He said: "Any action taken must be evidence based and must deliver a sustainable schools system for the next 10 to 20 years.
"Financial sustainability has to go hand in hand with educational excellence, I want to see Powys schools deliver consistently high standards of education for our young learners across Powys."