The Association of County Councils welcomed the report as a vote of confidence.
The commission said: 'Local government has coped with an avalanche of statutory change while effecting improvements to the quality and efficiency of services. It has maintained the tradition of local innovation and the development of good practice.'
Some councils were not making the best of the opportunities provided by market testing and advances in service delivery, it pointed out, but the overall picture was of local government doing a good job.
The annual report promises continuous development of performance indicators, in consultation with councils and consumer groups, to help members and officers deliver service improvements.
It called for the government to clarify cross-boundary tendering powers, which are assuming greater importance as councils search for economies of scale and cope with the impact of the review.
Outgoing commission chairman Sir David Cooksey said public bodies needed to be more effective at assessing needs and directing resources to meet them.
The move to divide service providers from service purchasers needed to be made more responsive to citizens' needs while maintaining standards of probity and strengthening accountability, he said.
Sir David believed the commission was in good shape at the end of his nine-year reign. 'It has set a clear strategy, strengthened its management, developed effective partnerships with the bodies it audits and with other stakeholders, and focused its sights on the impact it can make,' he said.