Christine Whatford, president of the Society of Chief Education Officers, has written to her members saying local authorities had expected all money arising from the reforms to teachers' pay to be additional.
She added there was likely to be "quite a significant reduction in local authority budgets, which they were not expecting".
Although the headline increase of this year's local government settlement for education was given as 6.4 per cent, it actually amounts to 5.4 per cent. A total of pound;150m has been removed by the Government to give to individual schools to pay teachers who cross the performance threshold.
Teachers who cross the threshold will receive a pound;2,000 rise and move to a performance-related pay scale. A further pound;300m will taken from the 2001 2 education authority budgets.
Although the figures were published during the comprehensive spending review, this pre-dated the Green Paper.
Ms Whatford said council officers were first made aware of the pound;150m loss when they read the Department for Education and Employment's evidence to the School Teachers' Review Body, last month. She said: "Most councils have made calculations based on the 6.4 per cent increase."
Graham Lane, education leader of the Local Government Association, said: "We get blamed for money not reaching schools, but it just isn't there. And if the teachers' pay increase is above 1 per cent, it will be worse."
A government spokesman said: "There is a 5 per cent increase in real terms going into the system, in addition to the increase in the standards fund and money for the Green Paper reforms."