Scotland's councils have been urged to make "fundamental changes" to the way they deliver services due to rising demand and changes to funding.
A new Accounts Commission report said councils "face an increasingly complex, changing and uncertain environment".
The watchdog said local authorities must "think differently about how they deliver and fund services".
The government recognised there were "challenges" for councils, but said it had treated them "very fairly".
But opposition parties said the report underlined that local authorities need more cash and fund-raising powers.
The latest Scottish budget debate at Holyrood was again dominated by disagreement over the funding being made available to local authorities.
Opposition parties point to a real-terms reduction in the core revenue grant available to councils, while ministers contend that the overall package - including ring-fenced grants and other funding - has gone up.
The Accounts Commission said funding had "increased slightly" between 2018-19 and 2019-20, but set this against a longer-term reduction of 6% in total revenue funding since 2013-14.
And the report underlined that an increasing share of local authority funding is now tied to Scottish government priorities. This rose from 6.6% of revenue budgets in 2018-19 to 12.1% in 2019-20 - leaving councillors with "less flexibility in where to spend and where to save".
This comes against a backdrop of an ageing population and rising demand for the services delivered by local government.
While the government is planning new ways for them to raise revenues - including powers to levy a local "tourism tax" and another on workplace car parking - the Accounts Commission report noted that councils are already "looking for other options to increase income".
They found that 11 different service charges had increased by more than the rate of inflation in recent years, highlighting a 20% increase in the cost of burial plots and a 12% rise in the cost of funeral services.
However, the report concludes that current efforts "are unlikely to be sufficient to address the growing gap between demand and resources, and more fundamental changes are needed".
'Difficult choices ahead'
The report reads: "While councils have continued to find ways to manage funding gaps and have made good progress with medium-term financial planning, they face an increasingly complex, changing and uncertain time ahead.
"To continue to improve the outcomes for their communities within this context, councils need to be open to transformational change and implement new ways of working."
Gail Macgregor, resources spokeswoman for local authority umbrella body Cosla, said the report "clearly shows that councils have performed well and continued to deliver essential services for their communities over the last year despite the severe financial challenges that they face".
She added: "Today's report also makes clear that difficult times and choices lie ahead - coupled with continuing pressure on our finances."
Graham Sharp, chairman of the Accounts Commission, said: "It's important to recognise that councils are working hard to maintain and, in some cases, improve services.
"Now fundamental change is needed to ensure services meet the shifting demands of local communities, with councils working and collaborating with communities to deliver the change needed. Councils must now focus on changing how front-line services are designed and delivered."
A Scottish government spokesman said there were "challenges" for local government, but insisted that it had been treated "very fairly" in budget allocations.
He said: "Local authorities will receive £11.2bn in 2019-20 through the local government finance settlement, a real terms increase in both revenue and capital funding which, together with actual council tax rises, provides an extra 5.6% in overall resources to support local services.
"We welcome the report's findings that local authority performance is largely improving or being maintained. We expect all councils to consider and take any necessary action to implement the report's recommendations to help meet future challenges and continue to improve outcomes."
Scottish Conservative local government spokesman Alexander Stewart said the government "cut council finances to the bone, then expects hard-working council tax payers to pick up the slack".
And Scottish Labour's finance spokesman James Kelly said the report "exposes the brutal legacy of the SNP's cuts to council funding".
Green MSP Andy Wightman said it was "essential that councils are better resourced and have more powers to fund services locally", while Scottish Lib Dem local government spokesman councillor Peter Barrett said ministers must provide councils "with the funding and economic levers necessary to properly tackle local priorities".