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In 2007, the whole structure of the school system changed as principals were given much more power and freedom in exchange for receiving simple, public grades on how well their schools are doing from "A" to "F" on an annual report card. But a study released Wednesday by the New School finds the policy of empowering principals is actually leading to better schools but it says those progress report grades have to go.

"We found that some really nice schools with engaging classes and kids making lots of progress scored very low on their progress reports and we saw some not-so-exciting schools where the kids had their heads on their desks and the teachers were reading newspapers, that got some great grades," said Clara Hemphill of the Center for New York City Affairs at The New School.

The study says a big problem is the report card grades are based in large part on now discredited state test scores. New York State Board of Regents Chancellor Merryl Tisch agrees the tests have been far too easy.

"We set the bar in terms of proficiency at a very low rate," Tisch said.

The chancellor says the problem of low standards doesn't stop with elementary and middle schools exams. She says plans are in the works to raise the bar for high school graduation, changing the passing grade on Regents exams from 65 to possibly 75.

"We are going to look at a Regents diploma that aligns with college ready. So we are going to be telling the truth about the graduates," Tisch said.

And the policy that allows each school to grade its own students' state exams may also change because of concerns that some schools may be giving students higher grades than they deserve.

"We are deeply troubled by all of the audits that come back to us from the different school districts about the grading of these exams," Tisch said.

The chancellor says all of the changes will likely cause both report card grades and graduation rates to go down during the next few years.

"It's going to be a very big shock to the system," Tisch said.

The New School report says all the problems with the state's testing means the city should get rid of the "A" through "F" report cards and judge schools less on statistics and more on what's actually happening in classrooms.

The Department of Education says it plans to just keep improving the report card system while the state fixes the tests.