It's not that they "fail the test." It's that they don't continue to make the required level of improvement year after year to have 100% of their students passing the test by the stipulated year. Which was, IIRC, this year.
An analogy. I observed a Xian school once. Tuition was $20k/year 5 years ago. It had an active scholarship program for disadvantaged kids. It dripped technology. Its teachers were great. Many had masters not in ed but in their field. More than a few had PhDs. You start with a battery of tests, and if you have deficiencies in math, reading, English, etc., you had free required classes with in-school paid tutors before the school year started, before and after school, on weekends to work with you one-on-one until you came up to standards.
The school aimed for 100% college attendance. It had counsellors, motivational speakers, college visits, visits by colleges, free PSAT/ACT/SAT tutoring/prep, free administration of tests, etc., etc. It had that goal for more than 10 years before it gave up. It quickly went from 80 to 90 to 95 to 98 or even 99, and there it stayed for a decade. But every year 1-2 kids would say "no" to college. Every year they failed at their goal. Finally they rejiggered their goal. Colleges were tiered. If I went to a tier 4 college I'd get some points for my class. If you went to a tier 1 college, you'd get more points. At the end, total the points and divide by the number of students. Their goal was to get that # as high as possible--which meant pushing kids from community college to a local 4-year school, from a low-ranked local school to a higher-ranked school, from a higher-ranked school to a prestigious school. Thinking U. of Texas-Austin? Try Duke instead. Thinking Duke? Go for Harvard or Stanford.
So if 95% of your students are passing a standardized test in Iowa, next year you may have to have 97% pass. 96% would be "fail." If you have 60% passing, next year you may need 65% to pass. But they've fixed all the easy problems. They teach the test and they teach to the test. Meal programs, tutoring programs, early childhood interventions. At some point disinterest, low-achieving family backgrounds, social dysfunction, even things like immigration rates and the numbers of LEPs matter. You get 4 kids in a class of 400 that don't speak English, who have had a really irregular education, who work long hours, and you can easily lose a percentage point on your pass rate.
The system suits too many politicians. It lets (R) say they're standing strong for high standards. It lets (D) say the same thing. It fights discrimination. It's for "accountability." It says parents aren't responsible.
It lets the government--technocrats, if you will, who know how things must be--force change on people. And if you're about social change and making things right (since you know how they have to be) it's a useful tool. You want out from this onerous law? Then you implement my reform. For (D) it's great--you get to be all authoritarian and strong-arm people, and at the end of the day blame a (R) law. (Even if it was bipartisan, (D) have long since foresworn participating in its conception and now perceive it to be entirely right-wing in origin.)
The problem with that story is that NCLB is exactly what technocrats, in 2000, said was how things had to be. They were about social change and making things right, and that was the data-driven, brain-based solution du jour. It compelled implementation of the "correct" and "right" reforms. It was a crock, of course. But useful for the new social-reformers who have the new correct paradigm to use in an ass-covering way.
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