Top marks have been awarded to Aberdeenshire Council by HMI for the financial management of the education authority.
Inspectors, who carried out their review of the council's education service in September and October last year, praised Hamish Vernal, director of education and recreation, for reducing an annual overspend of some pound;5million to achieve a balanced budget, scoring this as "very good".
Of the other 10 performance indicators, HMI judged the authority to be "good" in eight areas and "fair" in two - policy development and service planning.
The report was published in the wake of announcements by the council that it is to hold consultations on a school improvement plan costing almost pound;200m and likely to lead to the closure of 16 schools.
HMI acknowledged in its report that a third of primary schools and half of secondary schools were operating beyond their planned capacities, although a further 30 per cent of primary schools had occupancy rates of less than 60 per cent.
The inspectors' report said: "Elected members and officers faced the increasing challenge of addressing current demand while planning ahead for the projected decline in school rolls over the next 10 years.
"Elected members had identified the fact that the decline in school rolls would not be spread evenly and that some areas, where housing development was continuing, may see an increase in pupil numbers."
Inspectors praised the consistently high performance of Aberdeenshire's secondary schools, adding that pupils in both primary and secondary performed better than the average of comparator authorities and the national average in many measures of attainment.
They also described the authority's support for curriculum initiatives, such as writing and science in the primary school, as a "key strength".
Mr Vernal has been director of education since May 2000, and is due to retire in June this year.
He was described in the inspectors' report as "approachable, an able communicator and willing to engage with staff, headteachers and school boards". The report continued: "There were good examples of effective consultation and communication, such as that relating to the PPP scheme.
"However, there was a need to improve the extent to which teachers, support staff and parents were kept well informed and involved in developments.
"Too many of those interviewed by the inspection team were unsure of key strategic documents or the aims and values of the authority. Few were conscious of the contribution which could be made by staff to provision for pupils. These shortcomings restricted the extent to which staff were embracing new ideas and approaches, such as inclusion or more integrated services, and weakened the otherwise positive relationships with parents."
HMI described arrangements for continuing professional development as "good overall", adding that many staff commented positively on the range and suitability of courses provided. However, in some instances, staffing difficulties had prevented attendance, they said.
They also criticised a lack of effective security systems at school buildings.
"The council was failing to address adequately the risks for pupils and staff arising from unauthorised entry to school buildings. The situation was particularly problematic in secondary schools, where planned improvements to security would take some years to complete," said the report.
Audrey Findlay, leader of the council, which is controlled by a coalition of Scottish Liberal Democrat and Independent councillors, said she was pleased that the inspectors' report had highlighted the council's excellent performance in very difficult budget conditions.
She added: "Aberdeenshire Council's grant is 10 per cent below the Scottish average and, were we to be funded at even the level of the Scottish average, it would give us an extra pound;36m every year which, along with many other priorities, would allow us to bring teacher numbers up to recommended levels."