Microsoft Corp. founder Bill Gates yesterday challenged state lawmakers to use federal stimulus funds to revolutionize public education.

"Difficult times can spark great reforms. . . . A crisis can act as a pivot" for innovation, Gates told the 5,500-member National Conference of State Legislatures meeting in Philadelphia.

Gates said the $100 billion in economic-recovery funds earmarked for improving education should be used to improve schools for the nation's good and to compete globally.

He urged that states create more schools modeled on the best charter schools; hold teachers accountable for student performance; enforce nationwide standards; spread knowledge through online learning made available for free; and develop better assessment tools to evaluate individual pupils, teachers, and schools.

"The stimulus package contains funding for longitudinal data systems" to track students throughout their school years and into the workplace, he said. "I hope you will use it . . . to leave behind bad habits."

Noting that the United States ranks 10th among industrialized nations in the percentage of students graduating from college, he said, "If that's a leading indicator, I don't like where it is leading.

". . . It's important to remember there is no debate in China, Korea, and in Japan about how to apply standards," he said. "They have strong standards. . . . Our schools need to get better, or our economic positioning relative to others will get worse."

Through his philanthropy, the Bill and Melinda Gates Foundation, Gates has donated hundreds of millions of dollars to improving primary, secondary, and college education.

Fixing what is wrong with American learning, Gates said, requires new ways of looking at its problems.

Teachers are rewarded for "seniority and master's degrees," he said, and that is not the best way to ensure educational quality.

Critical in determining whether a student will drop out of high school, he said, is whether he or she connects with a good teacher in the fifth to eighth grades and develops a passion for lifelong learning.

A quality teacher would boost scores by 10 percentage points in a single year, Gates noted. "What that means is that if, in the United States, for two years, our teachers were all top-quartile teachers, the differences between the United States and the very best scores in the world would go away," he said. "We should identify those teachers, we should reward them, we should retain them, we should make sure other teachers learn from them."

The economic-recovery money creates new opportunities for public and private partnerships.

"There's never been so much money available at the federal level for innovation and experimentation," said Penn professor of public policy Ted Hershberg in a phone interview. His book, A Grand Bargain for Education Reform: New Rewards and Supports for Accountability, coedited with Claire Robinson-Kraft, will be published next month with partial support from Gates' foundation.

Georgia Rep. Alisha Thomas Morgan, 30, of Cobbs County, Ga., near Atlanta, liked what she heard from Gates.

"I agree with him wholeheartedly that we need to take the focus, when it comes to compensation for teachers, away from seniority and how many degrees you have [and put it on] performance," she said in an interview. "Every other field that we know, you are paid based on your performance."

In response to a question by North Carolina House Speaker Joe Hackney about how states can do more in turbulent economic times, Gates said class sizes might have to change.

"I am not against small class size," he said, but class sizes can grow, without negative consequences, "if you can raise the average effectiveness of teachers."

Interviewed as he left the Convention Center Ballroom where Gates spoke, Mayor Nutter said he agreed "charter schools are a tremendous choice option." But he also looked beyond crisis planning to the future.

He urged leaders to also make the most of the billions that are annually spent on education.

"Everyone has seemingly forgotten that all the agencies [of government] have billions of dollars in their regular budgets."

Contact staff writer Michael Matza at 215-854-2541 or mmatza@phillynews.com.