The report, released Thursday, says about one-third of 10,000 children in government care are high needs, because of childhood trauma including sexual abuse, mental health issues and addiction.
Many of the high-needs children are in government care, not because they need protection, but because their families can't manage them on their own.
The report suggests the province isn't capable of providing the necessary support.
"Manitoba does not have sufficient resources to meet the needs of this vulnerable population.''
The report says Child and Family Services doesn't look to the future, but focuses primarily on keeping kids safe in the short term with expensive emergency placements.
Since there aren't enough spots for children with complex needs, they have ended up in emergency shelters and hotels under the supervision of poorly trained staff. The use of hotels is now banned in the province.
Despite recommendations by the children's advocate in 2012, very little has changed, the report says.
"What was described as an 'unfortunate and unhealthy cycle' in 2012 has deteriorated into a chronic state of emergency in 2015.
"The crisis has been building for years ... The constant uncertainty, extensive gaps in resources, and the system's inability to stabilize have had a profoundly detrimental impact on service delivery to children, youth and their families.''
Family Services Minister Kerri Irvin-Ross declined to be interviewed about the report.
Rachel Morgan, her spokeswoman, emailed a statement saying the province has increased the number of specialized treatment beds, added more access to mental-health services and has committed to hire more staff.
"We are already at work on many of the advocate's recommendations and are developing a holistic approach across government to support children with complex needs," she wrote.
Manitoba child welfare has been under scrutiny for years following several high-profile deaths and assaults of children in care.
Most recently, Irvin-Ross tearfully promised to stop using hotels to house kids in care after a young girl was seriously assaulted in March. The girl's family was looking for help to cope with her behaviour. Both the girl and the youth charged were in the care of Child and Family Services at a downtown Winnipeg hotel.
The system also came under fire last August when 15-year-old Tina Fontaine was killed after running away from a hotel where she was in government care. Her great-aunt had contacted child welfare when she had difficulty managing the teen. Fontaine's body was found wrapped in a bag in the Red River.
Children's advocate Darlene MacDonald said in April that children in care were being kept in jail longer than necessary because of a shortage of appropriate foster care spots for those with complex needs.
The province must "reimagine'' and overhaul child welfare so it responds better to a child's long-term needs, MacDonald suggested Thursday.
That will take a significant investment, as well as co-ordination between justice, health and social services, she said.
"Long-term planning for youth with complex needs really needs to be getting beyond just putting out the fires. We have to develop placements that look at their unique needs and deal with the traumas they've had in their past,'' MacDonald said.
"We need to develop more placements where caregivers are specially trained to support youth.''