Oxford City Council was one of the poorest performing councils in the country between April 2000 and April 2001, according to a District Auditor's report.
In the Annual Audit Letter, the District Auditor said performance in many key service areas, notably benefits and planning, was extremely poor.
Performance was also unacceptable in income collection and accounts preparation, according to the report.
"Financially, the council is struggling to balance income with expenditure," added the District Auditor.
However, the document did recognise that the Lib Dem/ Green administration, which took over from Labour in May 2000, had embarked on a process of change by appointing Chief Executive Marion Headicar last year.
It added: "Performance in one priority area -- provision of housing for the homeless -- has improved."
Council leader Corinna Redman said a large number of improvements introduced last year meant that the report was out of date.
These included reducing a backlog of 9,000 items in the housing benefit department by about 50 per cent, creating 23 new business units, and speeding up planning applications.
She added: "The District Auditor recognises that since the completion of the report, much has changed within the council.
"The report paints a picture of a council that has been poorly managed for a long time, but is now moving in the right direction and making the necessary changes.
"Already we are seeing improvements in areas like processing of benefit applications and planning applications."
The council is submitting a budget for the new financial year from April, which contains £6m worth of budget cuts.
Council officers will now set out an action plan to set out how to tackle issues raised by the report.
Labour group leader Cllr Alex Hollingsworth, said: "It is very frustrating for Labour councillors to see how far the performance of the city council has sunk since the Liberal Democrats and Greens took over.
"This is a shocking report that condemns key services that the council provides.
"Just a couple of years ago our benefits service was one of the best in the country. It is condemned in this report as one of the worst."
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