The police must investigate a series of robberies along a strip of land in the city. The new mayor of the city (Kenneth Mars) assigns Captain Harris (G.W. Bailey) and Lt. Proctor (Lance Kinsey) to the case, but while on stakeout the Wilson gang manages to slip through their fingers.
The Mayor wants Harris and Proctor to work with Police Academy head Commandant Lassard (George Gaynes) on apprehending the gang. Lassard assembles a seven-man team consisting of Hightower (Bubba Smith), Tackleberry (David Graf), Jones (Michael Winslow), Hooks (Marion Ramsey), Callahan (Leslie Easterbrook), Fackler (Bruce Mahler), and Lassard's nephew, Nick (Matt McCoy) who transfers from Miami (in the previous film Police Acdemy 5) to the city to remain close to his friends and dull-witted uncle.
After distributing flyers as to the information of the Wilson gang and getting nowhere, Nick McCoy stumbles upon a paper heading of an antique diamond heading to a museum, and gets an idea to use it as bait: however the robbers nab the diamond anyway by cutting a hole in the truck and escaping through the sewer system. McCoy then decides to go undercover to get information regarding a possible hideout, but Harris decides to go undercover to get a confession.
It turns out that Harris goes undercover as a window washer at a tall building, for which he has a fear of heights, and gets a confession of himself on tape after his loyal but numb-skull lacky, Proctor, accidentally knocks him over the balcony.
It is revealed here that the robberies are committed by a group of three dim-witted criminals who do not seem to be able to do this on their own, and it is revealed they are being guided by a literally shadow figure known as the "Mastermind", who speaks to the three behind a wall of glass and uses a voice distortion device. He devises a plan to get the cops out of the way.
Commandant Lassard and his men are later suspended after drugs are planted in Lassard's locker, pending an investigation. The misfit cops decide to clear Lassard's name by nabbing the gang and the ringleader. Accessing data files from a computer, McCoy deduces that the robberies are occurring along a bus route, thus intentionally lower property values in that part of the city. They also learn that someone must be 'leaking' information to the bad guys, which is why they are always one step ahead of the Police Academy.
The Police Academy force finds and does battle with the Wilson gang, while Nick chases the leader. A pursuit follows, which leads to Commissioner Hearst's (George Robertson) office. It is revealed that the Mayor is the "Mastermind" and that Captain Harris has been unwittingly leaking information during his daily meetings with the Mayor. Hearst apologizes and reinstates the force, and a plague is given to honor the officers' bravery the next day.
As the movie closes, Harris is sitting in a chair when a string tying the balloon float is cut, lifting his chair and floating him up into the air as he shouts Proctor's name.