Hinojosa also urged both sides to come up with criteria for evaluating progress at the Evins facility, where problems have also generated several lawsuits filed by former inmates and staff members.
"This is a discussion between the federal government and the state government with this court in the middle," Hinojosa said. He added that the court "is the least equipped to manage a prison system."
Hinojosa urged both sides to try again outside of his purview or return to court next month with a more detailed plan.
Under the rejected proposal, the TYC and federal prosecutors had agreed to give a federal judge oversight over reform efforts for three years. But Hinojosa said the proposal failed to adequately address what would happen if the Justice Department's demands went unmet.
The settlement stipulated that staff members could only use restraint to maintain security, and not as means to punish inmates.
It also required the facility to provide adequate staffing levels to protect youth from harm and to develop procedures to allow staff and inmates to report abuse and sexual misconduct without fear of retaliation.
Revelations of inmate abuse and possible cover-ups shook Texas' juvenile corrections system last year and prompted state leaders to order a massive overhaul of the agency. Several top administrators were either fired or resigned.