It’s likely that college presidents around the world had a dollop of surprise along with their morning coffee recently when the Times of London released a global ranking of the 200 best universities.

Predictably, this survey of 1,300 academics in 88 countries found that Harvard – with its endowment of nearly $23 billion – held first place. The surprise was the university that came in second. Oxford or Cambridge? No, they were ranked fifth and sixth, respectively. Stanford or Yale? No, they were seventh and eighth. The second-best university in the world was a public, state-sponsored institution – the University of California at Berkeley. Public universities in Alabama, Arizona, Texas, Maryland, Michigan, Virginia and other states ranked among the global elite 200.

There is an irony here. For decades, many unfairly considered state schools to be, as they say at Oxford, “redbrick” – second-rate diploma mills. Now, just as U.S. public universities are finally winning the global recognition they deserve for quality, their very future is suddenly in doubt.

What is happening? State by state, the social compact that supported higher education is being dismantled. A Brookings Institution report revealed in 2003 that state appropriations for higher education have declined sharply, from an average of roughly $8.50 per $1,000 in personal income in 1977 to about $7 per $1,000 by 2002. It is unrealistic to think that state funding will ever return to robust levels, with state budgets being squeezed by the growth of Medicaid caseloads, roads and bridges crumbling under record numbers of drivers, homeland security demanding urgent attention, and the politics of tax-cutting continuing apace. In 2008 the financial pressure on public colleges and universities will only grow with the graduation of the largest high school class in U.S. history. Some look hopefully to Congress as it prepares a new higher education bill. As a former U.S. senator, I can assure you that a federal government facing monumental deficits is unlikely to take up the slack for the states.

If public colleges and universities are to survive, they must rethink everything they do. A decade ago, Gerhard Casper, then president of Stanford University, ignited an academic firestorm by suggesting that the four-year baccalaureate might not be such a sacred standard. Could a respectable B.A. be earned in three years? A prominent Virginia attorney recently proposed that state education dollars be diverted from institutions of higher learning to the students themselves. Many educators are willing to enter into explicit corporate alliances and co-branding of schools with sponsors. These may or may not be good ideas, but they represent the kind of iconoclastic thinking the funding crisis requires.

Foremost among any answers must be a drive to recast the relationship of public colleges and universities with the states. Public institutions of higher learning are often classified as state agencies. This identity forces schools to appeal to state bureaucracies to make modest changes in personnel policies or to construct new facilities, adding unnecessary delay in decision making and millions of dollars in unnecessary costs.

A proposal that was recently approved by Virginia Gov. Mark Warner and the General Assembly suggests one national direction. Presidents of Virginia’s two- and four-year institutions have secured a new compact that will provide greater freedoms for public schools. It will eliminate the bureaucratic burdens, political pressures and other factors that frustrate success, while enabling universities to be more entrepreneurial. This new paradigm will include predictable levels of funding, allowing administrators to make realistic long-term plans. In exchange, every institution will pledge to meet measurable and ambitious goals, including improving graduation rates, nurturing relationships with K-12 schools and opening doors to underserved populations.

In short, if states grant public colleges and universities greater authority to make their own decisions, they can expect them to be accountable for greater financial efficiency and academic performance.

Rethinking the definition of a public university may be a state issue, but it is one of national importance. In the 21st century, the rankings of these incubators of ideas will determine America’s technological, economic and military place in the world.

In a brutally competitive global economy, leaders can quickly fall to the rear. The Times of London’s rankings of the top 50 schools included six Australian universities and eight Asian universities, while only two from France and one from Germany made the cut. In an age of academic globalization, in which leadership can slip from the heart of Europe to Australia, we cannot afford to allow neglect and inattention to threaten the future of U.S. public colleges and universities.

We need to think hard – and act soon – if we want to continue to make the global grade.