Washington ? Dangling the promise of $5 billion in grants, President Barack Obama pressured states to embrace his ideas for overhauling the nation’s schools, ideas that include performance pay for teachers and charter schools.

To get the money, state officials may have to do things they, or the teachers’ unions, dislike. But in a recession that is starving state budgets, the new “Race to the Top” fund is proving impossible for some states to resist.

Already, seven states — Tennessee, Rhode Island, Indiana, Connecticut, Massachusetts, Colorado and Illinois — have lifted restrictions on charter schools so they can compete for the money.

“Not every state will win, and not every school district will be happy with the results,” the president said Friday. “But America’s children, America’s economy, America itself will be better for it.”

Officials from nearly a dozen states, including Washington Gov. Chris Gregoire, a Democrat, and Georgia Gov. Sonny Perdue, a Republican, joined Obama and Education Secretary Arne Duncan Friday at the Education Department to announce the rules for the competition.

Broadly speaking, the president wants states to do four things he considers to be reforms — toughen academic standards, find better ways to recruit and keep effective teachers, track student performance and have a plan of action to turn around failing schools.

The nation cannot succeed in the 21st century unless it does a much better job of educating its children, Obama said.

“In a world where countries that out-educate us today will out-compete us tomorrow, the future belongs to the nation that best educates its people, period,” Obama said. “We know this. But we also know that today, our education system is falling short.”

There is broad agreement about Obama’s assessment. Only about one-third of U.S. students could read and do math at current grade levels on national tests in 2007, the most recent year for which data is available. And the high school dropout rate is dismal — 1 in 4 kids.

Obama can’t really tell states and schools what to do, since education has been a state and local responsibility throughout the history of this country. But he has considerable leverage in his ability to reward states that follow his path and withhold money from those that don’t.

The $5 billion fund was part of the economic stimulus law passed earlier this year. It is a fraction of the $100 billion that was included for schools, but the fund is massive compared with the estimated $16 million in discretionary money Duncan’s predecessors got each year for their own priorities.

“None of them had the resources to encourage innovation that we have today,” Duncan said.

Moreover, the $5 billion fund has taken on added importance because in many states, the bulk of the stimulus money is being used to fill increasingly larger budget holes, and not for the innovations Obama wants.

A report from the Government Accountability Office earlier this month said school districts are planning to use the money mostly to prevent teacher layoffs.