The Education Department says 34 states, the District of Columbia and Puerto Rico have major problems with the tests that were supposed to be in place in the just-ended school year. They will get federal approval only if they correct the problems in the coming year.
In addition, Nebraska and Maine had their testing systems rejected outright.
They all face the threat of losing from $40,000 to more than $1 million of the money they receive to administer the No Child Left Behind law. In most cases, the total would be less than $100,000; Nebraska and Maine could lose one-quarter of their dollars.
The money would go instead to school districts, skipping state governments altogether.
The report card of the states, released Thursday, is intended to get them to finish the job.
President Bush's education law orders states to hold math and reading tests in the third- to eighth-grade, and once in high school. The deadline was the end of the 2005-06 school year.
Every state did have testing in the required grades. But many states still have significant problems, such as developing exams for disabled or limited-English students, or ensuring that tests are technically sound.
Texas, the home state of the president and Education Secretary Margaret Spellings, fell short because of a number of federal concerns, including whether the tests match up to the content that students are supposed to learn.
Only 10 states won full approval. Four others are expected to get there soon.
Deputy Education Secretary Ray Simon said the states' overall performances were positive. Even the 36 jurisdictions whose approval remains pending probably will get the federal OK within a year, he said.
"I think maybe the scope of the work was just more broad, difficult and time-consuming than many of them thought," Simon said Thursday. "I don't think there was any attempt for them to sit back, do nothing and say, 'Let's see how much we can get away with."'
States that have fallen short must submit a plan and a timeline for improvements. They may appeal their status, too. Those with continued problems could lose 10 percent to 25 percent of their federal administrative money.
Nebraska and Maine, the states most at odds with the department, face the maximum fine -- a one-fourth cut.
Nebraska's education commissioner, Doug Christensen, said the federal decision blind-sided him and violated a past agreement.
"I cannot recall a professional issue in my over 40 years as an educator over which I have been so disappointed," Christensen told Nebraska reporters on Wednesday.
The department announced its findings after a review by a team of testing experts.
Jack Jennings, president of the independent Center on Education Policy, said withholding administrative money from states could be counterproductive. State education departments rely heavily on federal money to hire the staff that oversee testing.
"They will be weakening the very agencies they expect to carry out the law," Jennings said.
Congress awards more than $400 million a year to states to help them develop tests, and billions more in aid to schools. The department has the option to withhold that money, too.
But do not expect that to happen, Jennings said. "It's easier to beat up on the state bureaucrats than it is to tell school districts they're going to lose millions of dollars," he said.