Inverclyde Council has been told to draw up plans to improve school buildings as a "matter of urgency".
The report has criticise education planning
School inspectors noted that an £80m private finance plan to improve crumbling buildings had been thrown out but no alternative was then offered.
Liberal Democrats decided to ditch the Labour scheme when they took control of the authority last year.
The inspectors said there remained "significant weakness in the management of the school estate".
The report, published on Tuesday, said the decision by councillors to abandon the public private partnership (PPP) project had resulted in an "unsatisfactory situation".
The HM Inspectorate of Education added: "Alternative plans, and the funding to support them, now need to be drawn up as a matter of urgency to ensure all pupils in Inverclyde are able to learn in a suitable school environment."
The authority said it is already holding talks on new plans, involving a combination of PPP and other funding methods, in an effort to resolve the crisis.
Council leader Alan Blair added: "For our community to be paying money to a private partner 10 years from now, 20 years from now, when the school might be surplus to requirements is - to be blunt - nuts.
"The fact that we are requiring to accept the PPP principal to some extent is because the Scottish Executive has given us no serious alternative."
Peter Peacock: Legislative plans
It was not all bad news for the authority. The report said Inverclyde had made "very good" progress in the area of learning and teaching in schools.
It was also praised for its moves to improve educational provision for pupils with special educational needs.
And the education department had also given a clear lead and made significant investment within the areas of human rights and race equality.
Education Minister Peter Peacock said: "We expect councils to act on HMIE reports. We are legislating to make sure we have powers to require this in future.
"I expect Inverclyde Council to take full account of the HMIE report and let
us know formally and quickly how they plan to proceed in principle to advance a revised PPP."
HMIE will make a further visit to the council in a year's time.