Northern Ireland's juvenile justice centre (JJC) is the envy of its neighbours in England and Wales, inspectors said.
Criminal Justice Inspection Northern Ireland praised effective management with a significant childcare ethos at the Woodlands facility in Bangor, Co Down, as well as considerable improvement over the last decade.
But it expressed concern at the high proportion of Catholic boys inside and said it was still being used when no alternative accommodation was available for children with complex needs and challenging behaviour.
The watchdog said that represented "inappropriate" use of premises which costs around £8 million per year.
Chief inspector of Criminal Justice Brendan McGuigan said: "The JJC is without doubt, the jewel in the crown for the Youth Justice Agency (YJA) and Department of Justice (DoJ) and is a centre which is the envy of neighbouring jurisdictions.
"It is a facility which has made steady progress despite funding and staffing reductions which have occurred."
Many of the children aged up to 18 have suffered trauma and some may have special needs or mental health difficulties. Others have self-harmed or attempted to take their own lives.
Some have not been to school for years and many had no father-figure to look up to.
Spending cuts at Woodlands have focused on areas like improving staffing arrangements and avoided reducing frontline staff, Youth Justice Agency chief executive Declan McGeown said.
Resources have been directed towards improved health and education provision as well as earlier intervention before custody becomes an inevitability for young people, he added.
With the development of early intervention and diversionary programmes, fewer children are entering the criminal justice system. Only 15 were present when inspectors visited and the average is in the mid-20's.
Mr McGuigan added: "But for those young people who are required to be detained in a secure setting, the JJC provides an effective means of keeping them safe while delivering a progressive, child-centred regime."
The inspection said the majority at the JJC were 16 to 17-year-old Catholic boys, many admitted multiple times.
Mr McGuigan said: "While the JJC does not have control over the children who are sent there, it was concerning that 76% of children admitted to the centre in 2016-17 were from a Catholic background - an increase of 19% compared to the figures in 2013-14."
Mr McGeown said it was hard to pinpoint why that was the case.
"We are in receiving mode but when we get them they are treated fairly and equitably."
The chief inspector also expressed concern at the rise in the number of children admitted on a short-term basis, despite the issue being raised by his staff before.
"Yet this inspection found the JJC was still being used in this way. This situation must be addressed, particularly as 50% of children admitted to custody under Police And Criminal Evidence (PACE) proceedings were released within 24 hours."
Woodlands is designated by law as a place of safety for young people, and its officials said it was better than leaving a child in a police custody cell all weekend.
Inspectors recommended that civil servants across departments should should work together to create closer alignment between the JJC and the neighbouring Lakewood Secure Care Centre for children.
Mr McGuigan added greater alignment could lead to further improvements in the care provided to the children and create an opportunity to share costs and secure better value for money as there are significant similarities between the two facilities in population, staffing levels and high costs.
He said management had introduced arrangements for effective healthcare since it was unable to transfer provision to a trust, resulting in considerable improvement but did not offer a long-term solution.