It is proposed that contract public schools (alternative elementary schools) be established within local school districts to develop more effective compensatory education programs. Each contract school will be governed by its own council of directors, which will be elected by the parents of enrolled children. The council's authority to establish school policy will be based on a formal three-party agreement among the council, the local board of education, and the state office of education. The council will manage the budget of the school, which will consist of the same amount per child as is provided for the education of comparable children in the other schools of the district. The technique of school-based budgeting will be followed. Decisions on how to spend funds will be made by the council within the provisions of the three-party agreement. Enrollment will be voluntary and open to all. Some legal obstacles, particularly in the areas of the anti-subdelegation doctrine and certain aspects of collective bargaining agreements, will need to be overcome. Seven action steps for removing these legal barriers and encouraging the implementation of effective contract schools are presented. (Author/IRT)