The country's largest polytechnic, Unitec, has lost the confidence of the Qualifications Authority.
The authority said it was "not yet confident" in Unitec's educational performance or its capability in self-assessment and dropped its quality category from two to three on a four-point scale.
Its "external evaluation and review" report said Unitec's educational performance was marginal.
"This is because overall performance is variable, with unexplained and unaddressed outcome disparities for some groups," it said.
The report was based on visits to Unitec in November last year, four months after its governing council was replaced by a commissioner and in the midst of major cost-cutting.
It said course and qualification completion rates were comparable to other polytechnics but there was "a significant disparity" for Māori and Pasifika students.
"Unitec leadership has not as yet demonstrated sufficient self-reflection and resolution to address such matters despite Māori and Pacific making up a large part of the student demographic," the report said.
It said there were gaps in teaching and assessment in some areas and for the past couple of years Unitec had not always met external requirements for moderation and enrolments.
"Although Unitec has addressed a range of compliance breaches since 2016, efforts remain largely reactive."
The institute's interim chief executive, Merran Davis, said the NZQA report was disappointing but expected.
"It wasn't a surprise because we were well aware there were major issues," she said.
But Ms Davis said students could still have confidence in Unitec.
She said the report showed the institute had good staff and changes made by the new leadership team were making a difference - they just didn't happen in time to be captured by the Qualifications Authority's audit.
"We're confident that we're on the right track," she said.
Unitec used to be New Zealand's biggest institute of technology - or polytechnic - with more than 10,000 full-time students.
Ms Davis said the institute was expecting about 6500 full-time students this year and it would also make a deficit, though she would not say what was forecast.
However, Ms Davis said Unitec was on track to make a surplus next year.
President of the Tertiary Education Union, Michael Gilchrist, said restructuring during the past five years was to blame for the bad NZQA report.
"Unfortunately the momentum of that disastrous change transformation was too hard to arrest and there has been a downgrade," he said.
Mr Gilchrist said staff had opposed many of the changes but they had more confidence in the institute's new leadership and expected the next NZQA review would have a better result.
The Qualifications Authority report said Unitec must urgently address gaps in quality assurance.
It said leadership groups "struggled to articulate key quality assurance policies or risks, and did not clearly describe how the quality assurance of all programmes was
routinely monitored and safeguarded".
The report said Unitec's support for students was strong but its ability to assess its own work in this area was marginal.
Governance and management support for educational achievement was marginal.
"Unitec's governance and management, for the period 2016 to early 2018, failed to support educational achievement to minimum standards," the report said.
It said the new leadership team had made improvements but their success was only partial and Unitec's management of important compliance accountabilities was marginal.
The report said managers acknowledged there had been "many breaches" since 2016 including problems in some courses with external moderation, credit reporting, and English language testing.
The report said since the previous NZQA report in 2016, Unitec had not managed its finances in a satisfactory manner.
"The resulting financial deficits have placed the learning of the entire student body at risk. However, NZQA is confident that the Commissioner (with his special advisors) is now appropriately focused on a financial recovery plan which will better safeguard learner outcomes and ensure compliance with the Education Act 1989 Section 181(e) and other relevant legislation," the report said.
The report slammed Unitec's lack of attention to Māori students and Pasifika students.
"Overall, Unitec qualification completions for Māori learners were 46 and 47 per cent respectively for 2016 and 2017. This is significantly below other learners. NZQA is not convinced that Unitec has taken responsibility for low outcomes for Māori learners - with more than half of Māori students who study not completing the qualification they sought. There was no agreed measurement system or outcome targets for Māori. This is not satisfactory."
The report said 14 percent of Unitec's enrolments were Pasifika students but their qualification completion rates were about 50 percent. It said the institute was rectifying previous cuts to Pacific initiatives but its performance in meeting Pacific students needs had weaknesses.
"There is a need for Pacific outcomes to be a regular standing item on management and academic meeting agendas."
The review said Unitec's Business programme was poor with a qualification completion rate of just 36 percent in one course, and students had been "negatively impacted" by "a past 'transformational' project".
The institute's Social Practice programme was poor and the qualification completion rate for Unitec's Master of Social Practice was just six percent in 2017, despite a course completion rate of 100 percent.
"NZQA has significant concerns about the delivery structure of the National Certificate in Mental Health and Addiction Support. That is, Unitec could not demonstrate that a full-time programme of study had been appropriately delivered, with a range of suitable teaching and assessment methodologies," the report said.
It said Unitec's performance was good in its Building and Construction and Creative Industries programmes.
The report said employers supported Unitec's qualifications and most graduates found suitable employment. However, some sector bodies and community groups had been disenfranchised by changes in recent years.
It is unusual for a public tertiary institution to be placed in quality category three, but Unitec is not alone. Last year, Te Wananga o Aotearoa was placed in category three and in 2017 the West Coast's Tai Poutini became the first public institution in category four though in March this year it improved to category three.