The goal of this report is to formulate a true alternative to the current form of governance for public education. Based on studies of governance in other large decentralized service organizations and of local educational reform efforts, the report concludes that there is a real alternative. The alternative allows the schools to be operated by a variety of public and private organizations, based on school-specific contracts that would define each school's mission, guarantee public funding, and establish standards and procedures for accountability. The report argues that contracting creates positive performance incentives for school staffs; ensures that public funds are spent at the school level; and deflects pressure for the overregulation of schools. Following the summary, acknowledgments, and introductory chapter, chapter 2 makes the basic case that the present governance system in urban schools is failing. Chapter 3 provides an overview of the existing governance arrangements in urban public education, linking many of the failures of the schools to the governance structure. Chapter 4 sketches an alternative governance system based on contracts between local public authorities and schools or groups of schools. The disadvantages of two other widely discussed alternative forms of governance--one based on total privatization of ownership and one based on rigorously aligned performance standards, testing, and training--are analyzed in the fifth chapter. The final chapter offers suggestions as to how states and local communities can move toward contracting and how state and federal governments can promote governance reforms. The appendix contains a brief paper describing the views of a focus group on the provision of support functions in restructured Chicago public schools. (Contains 99 references.) (LMI)