(FORTUNE Magazine) – THE BELLS you hear ringing in your local schools these days may be the tocsins of revolution. Stung by the failure of earlier reforms, an increasing number of states and cities are radically altering the way they manage, finance, and * measure their schools. They are redefining what children should learn and how they should be tested. They are giving new powers -- and new accountability -- to principals, teachers, parents, and students. Behind these efforts lies a growing conviction that the public schools can no longer be repaired. They must be reinvented. Says Jack Foster, Kentucky's education secretary, echoing the consensus of FORTUNE's Education Summit: ''Unless we make fundamental changes, we as a nation are not going to make it. We don't have time to tinker around the edges anymore.'' State policymakers have learned a powerful lesson from the faulty reform efforts of the 1980s: You cannot legislate educational excellence simply by mandating more of the same -- more homework, more tests, more credits for graduation, or more minutes in the school day. The focus now is not on what students should take (four years of this and three years of that) but on what they should know -- how to write, compute, discern, debate, and work in a rapidly changing world. Officials are also beginning to realize that scores on standardized tests, however high they are, mean very little if the standards themselves are set way too low. Many states plan to abandon nationally marketed multiple-choice tests and replace them with their own brand of written exams and oral presentations. In some places there is growing recognition that meaningful reform has been stymied by the centralized education bureaucracy -- with its legions of analysts, experts, and enforcement agents. But restructuring costs money, and voters don't necessarily want to pay the bill -- especially during a recession. Many Americans comfort themselves with the usually false notion that the education crisis is not happening in my neighborhood. When Gallup recently asked a nationwide sample of adults to grade the country's schools, only 21% awarded them an A or B. But 42% gave top marks to schools in their own community. Worries Carroll A. Campbell Jr., Republican governor of South Carolina and chairman of the bipartisan National Education Goals Panel: ''Everybody likes to think that it's somebody else's house that's on fire. Well, they're all on fire.'' Increasingly, state courts are forcing the issue. Courts in ten states have declared unconstitutional the methods used to finance education. Cases are pending in 20 other states, and more could soon be filed in another half dozen or so. Judges have ruled that overreliance on local property taxes shortchanges poor districts. By compelling states to spend more for education and to spread it around evenly, they have hastened the debate on how well -- or how poorly -- money is being spent. NOWHERE have the courts had more of an impact than in Kentucky. In 1989, the commonwealth's supreme court, responding to a suit filed by 66 local districts, struck down the property-tax-based school-funding formula. But the justices went much further. They declared all public education in the Bluegrass State -- ''the entire sweep of the system, all its parts and parcels'' -- unconstitutional. The schools, the court said, were failing just about everybody. Last year, Governor Wallace Wilkinson signed the Kentucky Education Reform Act, probably the most radical piece of educational engineering ever embraced by a state government. The legislation, strongly endorsed by Kentucky's leading businessmen, pumps an additional $950 million into the public schools over the next two years, an increase of 32% over the previous biennium. The new money will be used not only to help poor districts but also to overhaul education throughout the state. The act mandates that preschool programs be available for all ''at risk'' 4- year-olds, such as those from broken or impoverished families. Recognizing that children learn at different speeds, the law requires all elementary schools to abolish grades one through three and replace them with classes in which pupils are grouped according to educational progress, not age. But its most controversial component is -- hold on to your hornbooks -- empowerment. The new law wrests considerable power from the state department of education and local school boards and hands it to councils in each school comprising the principal (who serves as chair), three teachers, and two parents. The councils are being introduced gradually. By 1996 they will control all of the state's 1,366 public schools. The panels, whose teacher and parent members will be elected for one-year terms by their peers, have the authority to pick textbooks, design courses, and help select teachers. The hope is that decentralization will promote profound innovation. To keep local schools from wandering off into the ether, Kentucky has crafted a novel system of rewards and sanctions. Schools are free to pick any instruction methods and materials they wish, but the state will hold them accountable for what students learn. - THE STATE'S education department plans to establish explicit standards for what children should know at each grade level. Beginning in the 1992-93 school year, the state, using custom-designed tests that include essay questions, will assess students in grades four, eight, and 12 -- the same levels called for in the Administration's education goals for the year 2000. The scores will be used to establish a baseline in each school. Where scores, attendance rates, and other factors rise significantly, the state gives the school a bonus of at least $1,000 for every professional; it can be divvied up or used to improve the school. When student performance slips precipitously, however, the state will declare the school to be ''in crisis'' and will dispatch a team of ''distinguished educators'' to devise a rescue plan. Students will be able to transfer to another school outside the district if necessary. The principal and all teachers will be put on probation. Any or all can be fired if the rescue team recommends it -- tenure or no tenure.

ELLIOTT COUNTY, Kentucky, a hilly, sparsely populated school district on the western edge of Appalachia, has no traffic lights and no industries, just a smattering of small tobacco farms. The biggest employer is the local school district. Thanks to money from the reform act, its high school now has two new science labs and 48 personal computers, with software to help students learn English, math, biology, and physics. At the Isonville Elementary School, one of the first to be governed by a council, the air crackles with the sound of noisy learning. Pupils from age 5 to 9, no longer divided into grades or confined to their desks, work in small teams, using everything from blocks to computers to essay books. Says principal Ray Tussey: ''Schools have always been told by the central office what to do. Now we can control our own destiny.''

Whether these councils will actually improve education or simply create another level of bureaucracy remains to be seen. The largest experiment with school-based decision-making has been in place for only two years -- in Chicago -- and the report card is mixed. Each of the city's 597 public schools is governed by an 11-member council made up of parents, community members, teachers, and the principal. For high schools, a student is added. Eight members of the council are elected every two years by parents and residents of the area the school serves. The others are appointed by the board of education.

The councils, which are chaired by parents, have the power to design curriculums, pick textbooks, and allocate funds (although salary levels are fixed by citywide collective bargaining). If a majority of council members think the principal is doing a lousy job, they can recommend to the city superintendent that he or she be dismissed. When a principal's contract comes up for renewal every four years, the council decides whether to approve it. Decentralization has so far done nothing to improve Chicago's low test scores or high dropout rates. Some councils have been caught up in the Windy City's blustery brand of political power struggles. But the panels have, in the judgment of most analysts, fostered a new -- and desperately needed -- spirit of innovation and neighborhood involvement. THAT KIND of public support is crucial to reform, especially when the economy turns sour. Look at Connecticut, a state suffering through a prolonged slump and a painful fiscal crisis. Eight years ago, when the state was flush, it began a concerted effort to improve the quality of teaching -- and learning. The most noticeable change was a steep increase in teacher salaries. Ranked 17th in the country in pay six years ago, Connecticut was No. 2, behind Alaska, in 1990.

With loftier wages have come stiffer standards. College sophomores who want to teach must first pass a basic skills test. When they graduate, they face another exam, this time in the subject they plan to teach. The two tests -- known as Conncept and Conntent -- weed out fully one-fourth of all wannabe teachers. First-year teachers must then be approved by a panel of seven experienced educators before they are certified. The higher salaries have done wonders for morale. New teachers are better qualified. Their college grades and SAT scores are considerably higher, on average, than those of entering teachers in the past. But only 10% of Connecticut's 37,000 active teachers have passed through the Conncept and Conntent gantlets. And when teachers are laid off, as they have been throughout the state, the last to be hired -- often among the best and brightest -- are the first to be fired. The reforms have made a difference in the classroom, although not nearly as much as anyone would like. Six years ago Connecticut established the sort of statewide academic standards that Kentucky is only now contemplating, and it created a series of exams -- known as the Connecticut Mastery Tests -- to measure student progress. Scores on those tests, which are administered in grades four, six, and eight, have inched steadily upward. The test results, which the state releases on a school-by-school basis, have prompted local officials to work harder in areas where their students have done poorly, usually reading comprehension and writing. At the same time, however, SAT scores have fallen in Connecticut, as they have around the country. That's partly because a broader sample of students are taking the tests. But it's also a sign of how long it takes for education reform to really make a difference. The state legislature, meanwhile, has cut back money for teacher salaries and teacher training.

DONNA SHEA, a sixth-grade teacher in Southington, Connecticut, had to moonlight as a supermarket cashier when she began teaching 12 years ago. Her pay, which in the past five years has risen along with that of other teachers in the district by more than 60%, is not the only thing that has improved. So have her teaching methods. Twice a month, for example, two local bankers help her students set up a mock bank. The pupils learn to keep ledgers, pay rent, and even make videotaped commercials. But Southington, an economically mixed community midway between Hartford and New Haven, has had trouble keeping its own ledgers in balance. Two years ago it laid off 15% of the teacher aides. This year's annual equipment budget -- which covers everything from computers to blackboard chalk, though not textbooks -- will be squeezed from $500,000 to just $20,000. Summer-school tuition has doubled. Laments superintendent Louis Saloom: ''Services are being cut at the very time when we should be reaping the benefits of the changes we made in the Eighties.''

In South Carolina, popular support for education reform remains strong. In 1984, when the state passed its landmark Education Improvement Act, the legislature increased the 4% sales tax to 5%, with the proviso that proceeds from the extra levy be used exclusively for school reform. Since then, ''Protect the penny'' has become a rallying cry for proponents of educational innovation. A bunch of pennies can buy a whole lot of improvement, but South Carolina's task is far from complete. The new money for education has been used, in part, to establish more remedial classes for lagging students and more advanced- placement courses for talented ones. The legislation has boosted salaries and set stiffer standards for teachers and principals. Two years ago lawmakers bolstered the reform effort by passing Target 2000, an act that provides more funding for school readiness and dropout prevention programs. Since 1983, SAT scores in South Carolina have risen 36 points, bucking the national trend but still leaving the state in last place. Enrollment in advanced-placement courses has more than quadrupled since 1979, and a higher proportion of high school graduates are attending college. Says Barbara Nielsen, state superintendent of education: ''We've made progress, but South Carolina isn't where it needs to be.'' She is also trying to de-bureaucratize her own department. Since taking over last January, she has cut 143 of 549 administrative jobs and compressed seven layers of management into three. Nielsen is accelerating a deregulation program begun two years ago. So far, 175 schools have been granted waivers from state rules that would have prevented them from innovating. Says she: ''Schools need to be able to color outside the lines. If you don't have some flexibility, how are you going to build the new paradigm for education?''

JAMES WILSFORD has never met a regulation -- or a paradigm, for that matter -- that he wasn't willing to bend or stretch if it would help his students. Wilsford, who just retired as superintendent of District Five in Orangeburg County, South Carolina, has seen tremendous improvement in the performance of his students, 80% of whom are black and 75% of whom qualify for the government's free or reduced-price lunch program. The high school dropout rate has fallen to just 10%, and 67% of graduates now go on to a college or technical school. Thanks in part to a $1.8 million grant from IBM, the high school will soon be wired with 600 computer screens (one for every three students), linked to a library of databases and audio-video images. Despite such modernization, Wilsford shudders when he hears the word ''restructuring.'' He cautions the state not to cut back on funding for remedial training in basic skills: ''You can't restructure around poverty, crack addiction, and transient families. First you need compensatory education.''

ALL STATES need better ways to measure student progress. Officials have begun to realize that standardized, multiple-choice tests can sabotage their most valiant attempts at reform. Says Richard Mills, commissioner of education in Vermont: ''It doesn't make any sense to teach students to polish their writing skills and then test them with a fill-in-the-blank test.'' Vermont has pioneered the use of portfolios, assembled over the course of the school year, to evaluate students. The main challenge confronting state school administrators in the Nineties is still the need to prepare students for jobs. By that measure, virtually all are flunking. Oregon, which leads the nation in SAT scores, recently gave its adult population a literacy test. The results were dismaying. Yes, most people can read, but can they think? Only 35% of those surveyed could determine the right amount of medicine to give a child by using a chart that specified dosages according to the child's age and weight. In July, Governor Barbara Roberts signed four pieces of legislation that aim to put the schools into better sync with the workplace. All tenth-grade students will take an achievement test designed to help them make an early choice of careers. What they choose will propel them either to a pre-college curriculum or vocational courses, possibly supplemented by an apprenticeship. Like most bold attempts at restructuring, this one is controversial. But officials insist that the plan is not designed to track students into separate and unequal educational categories. In the closing years of this century, voters in every state will have to decide whether their leaders can be trusted to build a radically different public school system -- one that actually educates all children. Radical change is a tough sell. Says Michael Cohen, executive director of the National Alliance for Restructuring Education: ''This is not simply a matter of raising taxes or changing an organization chart but of changing the entire culture. And people have discovered that it is pretty damned hard to do.'' Difficult to do, hard to explain, but too damned important to ignore.

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