More than one million pounds, which was earmarked for improving education provisions in London Colney, could instead be spent on expanding Sandringham School for Wheathampstead pupils.
Hertfordshire County Council was given £1.2 million to mitigate the effect of building 800 homes on the former Napsbury Hospital development in 1998.
However, it plans to spend the money expanding Sandringham School by 30 pupils, guaranteeing places for 25 students from the Wheathampstead area, at a total cost of £3.18 million.
London Colney councillor Dreda Gordon said her ward had a greater educational need for the money as one school which offers places to London Colney pupils is in special measures and two others require improvement.
She added: "London Colney will not benefit from this whatsoever - not now or in the future."
Malcolm Macmillan, chairman of London Colney Parish Council, described the plans as "a classic case of municipal mugging."
He added: "There are no benefits for us, and we have educational needs in London Colney. There would be numerous ways we could spend the money.
"There is something immoral about this. We are furious, absolutely outraged."
The money was given to the council by the builder of the Napsbury Hospital site, for "additional secondary educational school facilities serving the development".
It was given under a section 106 agreement, where builders can mitigate the effects of their development on the roads, infrastructure and the local community.
Speaking at an enterprise, education and skills cabinet meeting on Monday, Councillor Gordon said: "We are led to believe that this money is allocated to the community for a certain inconvenience.
"The Napsbury Hospital site has 800 dwellings on it, which had a massive impact on residents. Sandringham School will not provide education for children in London Colney.
"In times of equality I would ask why they are moving £1.2 million away from an area where there is an educational need.
"I recognise there are problems in Harpenden but how can siphoning money out of London Colney be justified?"
The expansion of Sandringham School is part of the council’s £10.9 million programme of secondary school expansion in the county.
The plans aim to meet a shortage of secondary school places in Harpenden and Wheathampstead, until a new secondary school can be built.
Councillor Gordon added: "I understand the move of Harpenden pupils is temporary - however, the withdrawal of money from my area will not be temporary.
"If this happened the other way round and money was being siphoned off Wheathampstead and Harpenden I am sure the barricades would have been mounted by now."
Justin Donovan, director of education and early intervention at the county council, said: "It is very important to use our section 106 funding whenever we possibly can.
"We have picked up schools that need expanding. This expansion is classed on district need rather than neighbourhoods."
Chairman Chris Hayward added: "I understand local members’ opinions and passions can run high.
"However, our function is to consider the best needs for all our children in the county." The council’s cabinet is aiming to make a decision on the planned expansion in July.