(FORTUNE Magazine) – By the year 2000, every child must start school ready to learn. The United States must increase the high school graduation rate to no less than 90%. In critical subjects, at the fourth, eighth, and 12th grades, we must assess our students' performance. U.S. students must be the first in the world in math and science achievement. Every American adult must be a skilled, literate worker and citizen. Every school must offer the kind of disciplined environment that makes it possible for our kids to learn. And every school must be drug free. -- President George Bush ''The State of the Union,'' January 31, 1990

GREAT GOALS, Mr. President. Now it's time for you and the governors to get to work. By most measures the nation's education system is badly broken. Despite a doubling of spending in the 1980s, standardized test scores remain low, below those of our leading competitors. ''We can't fix the system,'' says American Federation of Teachers President Albert Shanker with painful honesty. ''We need radical change.'' Nearly everyone agrees that states must take the lead. The Constitution omits any reference to education among federal powers, so the responsibility lies by implication with them. Along with local governments, states pay 86% of America's education bill. Moreover, the statehouse is closer to the problems -- and the solutions. Says South Carolina Governor Carroll Campbell Jr., co- chairman of the National Governors' Association Education Task Force: ''Communities need flexibility in dealing with their particular areas. Parents don't want the federal government running education.'' Still, the President can focus public attention on the need for educational reform. George Bush already has earned an A for rhetoric by proclaiming goals, convening the first government-sponsored education summit, and honoring a teacher of the year. But to be worthy of the title Education President, he also needs to muster the resources of the executive branch to achieve results. On that score, he gets an Incomplete. A President wise in the ways of Washington and committed to education reform would appoint a more dynamic Education Secretary than Lauro Cavazos, the first Hispanic president of Texas Tech University, who seems to have been picked more for ethnic balance than for his reformist zeal. Such a President would create a new Cabinet Council on Human Resource Development that pulled together the Secretaries of Education, Labor, Health and Human Services, Agriculture, and Treasury, plus the Budget Director, for an all-out drive toward educational excellence. He would also appoint a high-level adviser in the White House to push important initiatives through political roadblocks. But Bush has done none of these things. Says former Labor Secretary Ann McLaughlin: ''Managing U.S.-Soviet relations alone won't keep America strong. We need a national commitment to lifelong learning.'' Though Bush has shown no interest in major increases in federal spending to improve education, he should. An epidemic of social ills from drug abuse to homelessness continues to distract youngsters from the business of learning. Washington must attack these problems more aggressively and improve the delivery of social services to the needy. One way is to tie federal aid to states to the development of so-called one-stop service centers in or near schools where poor people can get food stamps, housing, job training, and other kinds of help all in one place. The single most important thing President Bush can do is push for more money for existing federal programs that prepare poor children for school. The highly effective Head Start preschool program, for instance, reaches about a fifth of the poor children eligible for it. But the Head Start budget should plan for higher teacher salaries and better quality control -- not just more students. Washington should also spend more on programs that provide nutrition and health care for needy children. A good example is recent federal legislation financing comprehensive social service centers along the lines of Chicago's innovative Beethoven Project. Funded from public and private sources, Beethoven trains older women in public housing developments to visit expectant mothers and tell them about available prenatal care, family counseling, and other social services. The program also provides health care, nutrition, and preschool classes for neighborhood children. THE PAYOFFS from such investments are enormous both for individuals and for society. The House Select Committee on Children, Youth, and Families reports that a dollar invested in prenatal care saves up to $3 in hospital costs alone. A dollar invested in preschool education saves as much as $6 in special education, welfare, crime, and lost productivity. Says Ernest Boyer, president of the Carnegie Foundation for the Advancement of Teaching: ''Early intervention is powerfully in America's self-interest.'' The Administration can use its regulatory muscle as an instrument of change. Federal aid to education is so narrowly structured that it can penalize performance. For instance, computers bought with ''Chapter 1'' money for educationally disadvantaged children cannot be used at night to teach adults to read. And if a school succeeds in keeping more students from dropping out or failing, aid is reduced. The National Center on Education and the Economy, chaired by Apple Computer CEO John Sculley, has a sensible alternative: Allow states greater flexibility in the use of federal funds in exchange for adopting -- and living by -- ambitious student performance goals. Legislation along those lines introduced by Vermont Congressman Peter Smith deserves serious attention by Congress. The federal government should play a more extensive role in educational research and development. While the Department of Education has established some measures of student achievement nationally, including the data below, it lacks the budget and in many cases the legal authority to gather information needed to compare countries, states, school districts, schools, or individual students. Education administrators, testing companies, and the Parent-Teacher Association -- representing mostly teachers -- have objected vehemently to some of the small steps Congress has taken to increase federal oversight. Educators object on grounds that accurate measures are not possible. But critics think they're mainly worried that comparisons will show how badly they're doing. Some states are developing their own new measurements, but a coordinated approach demands federal leadership. A good beginning is New Mexico Senator Jeff Bingaman's national report card bill, which would set up a commission of experts to assess progress toward national goals, identify gaps in existing data, and make recommendations for improved testing. Finally, Washington can spur innovation through well-designed pilot projects. The President has focused on the worthy goal of better teaching. His proposals include merit pay for excellent teachers and grants to states to improve math and science teaching and to develop alternative certification procedures. But he has missed one enormous opportunity: the chance to lead the way to the classroom of the future by underwriting the development of interactive video software and training teachers in its use. Says California school superintendent Bill Honig, who has developed a new history video program with Lucasfilm, Apple Computer, and National Geographic: ''Such investments can pay huge dividends.'' (See Technology.) Many governors have been pushing reform long enough to understand what works and what doesn't. Strategies are beginning to change. Most early efforts focused on tough rules: tighter course requirements, higher teacher certification standards, and the like. But performance did not improve markedly. Now many states are concentrating on results. Says Chester Finn, assistant secretary of education in the Reagan Administration: ''The shift from regulating means to regulating ends represents a historic change.'' THE FIRST STATE to move wholeheartedly in that direction was California. In 1983 the state's Democratic leaders launched a major drive to prepare youngsters for the new information-age job market and to function as citizens of a democracy. The goal-setting process involved educators, parents, community leaders, business, and labor. The state-financed program involved heavy investment in new technology and teacher development, and resulted in major changes in curriculum, textbooks, teaching methods, and testing. Schools were encouraged to seek waivers from any state regulations they felt got in the way of specific programs. The result: Despite a surge in enrollments -- including many poor and bilingual children -- eighth-graders' performance improved 25% in three years. South Carolina followed a similar course with equally impressive results. In six years the state raised average scores on the Scholastic Aptitude Test 40 points, more than any other state. Fifteen other states have enacted such reforms, including Kentucky, which was forced to do so by the Kentucky Supreme Court. Because of the way Kentucky's schools were funded, among other problems, the court ruled that the whole system violated the state's constitution. Starting from scratch, the state has opted for a performance- based system that gives unprecedented freedom and responsibility to individual schools. + What lessons can be drawn from these pioneering efforts? First, successful reform requires cooperation among traditionally combative power centers. Responsibility must flow from the statehouse to the schoolhouse without loss of accountability. Business must get involved. School administrators and union leaders must share control with teachers, parents, and students. It isn't easy. Says New Mexico Governor Garrey E. Carruthers, a Republican who just maneuvered a sweeping reform package through his Democratic legislature: ''Make no mistake, it takes political leverage, good old- fashioned horse trading, and more money.'' To win support, Carruthers had to raise teachers' and administrators' salaries, fund after-school programs, and offer extra money to schools that restructured. The cost: $50 million a year more in revenues, raised through a 0.25% increase in gross-receipts taxes. His fellow Republicans howled, but the governor finally persuaded them with stiff accountability standards embedded in a report card bill. All 88 school districts must now report annually on how well their students do. Says Carruthers: ''The key was accountability.'' Many reform governors have found that accountability demands new measures of performance. Across America, most public schools rely on multiple-choice tests that measure a student's retention of facts but not the analytical skills that will be needed in the future. Critics say standardized tests discriminate against minorities and distort classroom instruction by putting too much emphasis on memorization. To refocus students and teachers on creative thinking and teamwork, several states are experimenting with new forms of testing. Vermont plans to test fourth- and eighth-graders in writing and math using three methods: a uniform test, a portfolio of work developed over the course of the year, and a single piece chosen by the student. In 1991, Connecticut will launch a new math and science assessment of high school students involving tasks that may take student teams as long as a semester to complete. A sample assignment: design, carry out, and report on an experiment to determine which food store in your community would save a family of four the most money over the course of a year. ONCE STANDARDS are set, schools must be held to them. Minnesota, Nebraska, Iowa, Arkansas, and Ohio rely on consumers to provide discipline. In the most radical change in the history of U.S. public school education, these states - allow parental choice -- students can attend any public school in the state. Eight other states intervene directly when schools don't make the grade. In the best systems the state first offers financial and managerial assistance. If that fails, the state takes over the school or shuts it down. One South Carolina elementary school was turned around when state officials introduced IBM's innovative Writing to Read computer program. In Jersey City, school administrators stuck with their methods even when the dropout rate topped 30%. Thomas Kean, who was then New Jersey's governor, threw out the recalcitrants and installed a new management team. A way to win teachers' support is to free them of the regulatory strings that bind them like Gulliver lying on the beach. State boards of education often dictate what teachers teach and from what texts. States also control pay. Excellence is rarely rewarded: Pay is generally based on years served -- or in some cases endured. Many teachers lack career ladders: a 30-year veteran does the same work as a new recruit. Connecticut put teacher excellence at the center of its restructuring plan. The state has raised pay almost 40% since 1986 to an average $37,339, and increased standards. New teachers serve under experienced mentors. Veterans have to take 90 hours of professional development every five years, at state expense. NEW JERSEY eliminated its shortage of quality teachers through an alternative certification process launched by Kean. Applicants without traditional education degrees have to pass a test and agree to a year of supervision and after-hours training. Says Kean: ''It means engineers from Bell Labs can teach computer science, jazz musicians can teach music, and former private-school teachers can work in the public schools. The profession is revitalized, and there's a great big teacher surplus.'' Twenty-seven states are following New Jersey's lead. A number of states are also experimenting with financial incentives. Eight offer teachers and schools financial rewards for outstanding performance. In South Carolina the money can be used to buy instructional materials and computers or to train teachers. Last year 265 of the state's 1,100 schools won over $4 million in incentive money. States also must be greater fiscal equalizers among school districts. The Congressional Research Service reports that during the 1986-87 school year, over half the states spent twice as much per pupil in some school districts as in others; a third spent three times; New York, eight times. The courts have already required ten states to implement more equitable financing formulas, and lawsuits have been filed in ten others. Another key is higher student expectations and opportunities. That's what Minnesota Governor Rudy Perpich learned from his pioneering program that gives 11th- and 12th-graders a state stipend to attend classes at state colleges and universities. Says Perpich, who also started the nation's first statewide choice program: ''A number of students drop out because they are bored. Of all our reforms, this one is doing the most for education.'' Louisiana Governor Buddy Roemer learned the same lesson from a generous oilman. Two years ago Patrick F. Taylor offered to pay college tuition for 180 poor seventh- and eighth-graders -- most of whom had repeated two or more grades -- if they stayed out of trouble and graduated from high school with a B average. Today 150 are still in high school (19 moved, 11 were dismissed). On the precollege ACT test, half the tenth-graders scored at least 18, close to the national average. Inspired by Taylor's kids, Roemer pushed a bill through the legislature that puts state money behind a similar statewide program. Still, all the opportunities in the world may not be enough to help the student whose family life is abusive, who sleeps on the street, or who is addicted to drugs or alcohol. This is not a negligible number: New York City School Chancellor Joseph A. Fernandez says 28 babies a day are born to drug- addicted mothers, the equivalent of 365 kindergarten classes a year. Schools are not equipped to solve such problems. But to succeed in their mission, they will increasingly have to help students and their families get the help they need. In Albuquerque, New Mexico, the New Futures School is tackling the problem of teenage pregnancy. Founded by volunteers 20 years ago in the basement of a YWCA, New Futures combines on-site health and child care, nutrition advice, personalized counseling, and job placement for 500 young women a year. While more than half of teen mothers nationwide drop out, about 75% of those in the New Futures program graduate and go on to jobs or higher education. Honeywell Chairman James Renier was so impressed that he flew two planeloads of Minneapolis-St. Paul city leaders to Albuquerque to see the school firsthand. Convinced, they are now trying to build their own New Futures schools. Who will pay for such promising reforms? Ideally, all levels of government. But given Bush's no-new-taxes posture, the reality is that state and local governments will have to pick up the check for most of them. That's not necessarily bad. Many governors, like Carruthers, have had the courage to raise taxes. And if New Mexico is a bellwether, voters have grasped a truth that still escapes many politicians: Either America pays now for educational excellence, or it pays more, much more, later.

BOX: FACT

The U.S. Army rejects 60,000 potential enlistees a year. They are not smart enough to serve.

BOX: THE TEN EDUCATION GOVERNORS

JOHN ASHCROFT (R-Missouri) By providing tutors for some lagging first-graders, Missouri has dramatically cut the number of children repeating that grade.

TERRY BRANSTAD (R-Iowa) Branstad is building the first two-way video network so teachers can reach students statewide.

CARROLL CAMPBELL JR. (R-South Carolina) His partnership with business to improve literacy and job training is the nation's most extensive.

BILL CLINTON (D-Arkansas) One of America's most articulate reform advocates, he has pioneered new approaches to early childhood development.

GARREY CARRUTHERS (R-New Mexico) This former economics professor will give New Mexicans an annual report card on the state's 88 districts.

BOOTH GARDNER (D-Washington) Gardner was one of the first to take a hard look at what students will need to know in the 21st century.

MADELEINE KUNIN (D-Vermont) Instead of relying on standardized tests, Vermont is pioneering the use of a portfolio of student work to assess math and writing skills.

RAY MABUS (D-Mississippi) To ensure that children start school ready to learn, the state screens 3-year- olds. Those who need help get it.

RUDY PERPICH (D-Minnesota) Parents can choose among schools statewide, and high school students can take courses in state colleges.

TOMMY THOMPSON (R-Wisconsin) Wisconsin is experimenting with choice and with cutting welfare for parents whose children are truants.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE NATION'S REPORT CARD