Information sharing among agencies in Bury, Greater Manchester, was also "antiquated", according to an Ofsted and Care Quality Commission report.
Inspectors said children with special needs in the town had been "let down".
Bury Council said it "accepted the criticisms" and that it planned "to address the areas of weakness".
Following the inspection between 12 and 16 June, the report concluded:
Inspectors said there was "less delusion" after the appointment of new leaders but their view was not shared by all leaders, which "hindered the pace of reform".
"These new leaders rightly place Bury as being two years behind where they should be in terms of implementation of the code of practice," the report said.
Inspectors said Bury could "be proud" that children who were looked after received good and quick care from health services.
Children with special educational needs and disabilities told inspectors they "enjoy living in Bury... and demonstrated a good knowledge of how to keep themselves safe and healthy".
Pat Jones-Greenhalgh, interim chief executive of Bury Council, said the report cited "many good examples", adding: "However, we accept the criticisms that there are serious shortcomings in the way health, education and social care services have worked together, and that we need to put families at the heart of the process."
He said the council and the local clinical commissioning group (CCG) had "already identified some of the main shortcomings found in the inspection" and had commissioned an external review.
"This review will be central in drawing up a formal plan of action to address the areas of weakness identified by the inspection," he said.
Stuart North, chief officer for NHS Bury CCG, added: "While there is lots of good practice happening in Bury, there are improvements that must be made to ensure that the experience of children, young people and their families, who access these vital services, is a positive one."
A local authority has been condemned for not having a strategy for children with special educational needs and for being "two years behind".