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American postsecondary education is a diverse collection of public and private institutions, ranging from community and technical colleges to comprehensive and research universities. These institutions are an invaluable resource to states and to the nation — they educate many of the talented people who work in our industries, businesses, and civic sectors, and they are the places where much of the research and development that benefits this country is conducted. While postsecondary education in the United States has already achieved key successes in the innovation economy, the public postsecondary education system overall risks falling behind its counterparts in many other nations around the world — places where there have been massive efforts to link postsecondary education to the specific innovation needs of industries and regions. This paper focuses on how states can better align postsecondary education with their economic needs, which will position them to compete in the global economy by producing a highly-skilled workforce and by unleashing postsecondary education institutions’ power to innovate. An innovative postsecondary system must: (1) Foster among its graduates the critical skills and capabilities needed to enhance state economic competitiveness; (2) Produce a well-qualified K-12 teacher corps that is highly skilled in the science, technology, engineering, and math (STEM) disciplines; and (3) Create new knowledge by investing in research and development (R&D) and by establishing policies that facilitate the translation of new ideas into innovative products, processes, and services. The document also introduces a new vehicle for aligning postsecondary education to state economies — the postsecondary education compact. Through the compact, state governments, the postsecondary education system, the Boards of Regents, and the private sector collaboratively embrace a public agenda to ensure that postsecondary education policies, programs, curricula, and resources address current, emerging, and future economic realities. Among other efforts to reform postsecondary education, governors can use the compact framework to encourage the postsecondary education system and other relevant stakeholders to agree on the mission and key outputs of a system that emphasizes innovation in exchange for state commitments to budget stability and enhanced autonomy in postsecondary education. The compact is based on an understanding of the economic needs of the state and the related outputs of the postsecondary education system. The compact involves establishing: (1) Goals; (2) State Responsibilities; and (3) Mutual Accountability. While offering accountability, the compact is flexible enough to allow for adjustments and to provide for coordination among stakeholders on how the responsibility for achieving the compact’s goals and outputs will be shared by all the participating institutions. Finally, the compact presents goals and challenges from a statewide point of view, and identifies challenges and opportunities as the compact matures and, if necessary, is renegotiated. The document contains an Executive Summary and five chapters: (1) Introduction; (2) A Vision of Postsecondary Education; (3) The Postsecondary Education Compact; (4) Advancing the Compact; and (5) Conclusion: The Role of Governors. (Contains 6 footnotes and 1 table.)