Schwarzenegger said he would sign the bills, approved Wednesday in the Senate and late Tuesday in the Assembly.
The reforms will let California compete for part of the $4.3 billion being made available to states under the Obama administration's Race to the Top initiative. California has the nation's largest public school system, with 6 million students.
Under the legislation, state officials could close failing schools, convert them to charter schools or replace the principal and half the staff. Parents whose children are stuck in the lowest-performing schools would be given greater leeway to send their children elsewhere and could petition to turn around a chronically failing school.
The measures also provide a method for linking teacher evaluations to student performance.
Schwarzenegger lauded the legislation, saying it contained reform that once seemed impossible. The bills will take effect 90 days after he signs them into law.
"For too many years, too many children were trapped in low-performing schools. The exit doors may as well have been chained," Schwarzenegger said while delivering his State of the State address to lawmakers.
The reform efforts were opposed by the California Teachers Association and other groups representing educators. They also divided Democratic lawmakers, some of whom said the measures had too little debate and went too far, or not far enough.
Schwarzenegger has been pushing lawmakers to act since calling a special session in August and saying the measures would ensure California can compete for up to $700 million from the competitive federal grants.
"This program essentially is extortion, plain and simple," said Sen. Rod Wright, D-Inglewood. "We're about to make permanent changes to our educational system and we don't even have assurances that we'll get ... the money."
The first federal deadline for applying for the money is less than two weeks away.
"Tens of thousands of children in California need our attention and resources," said Senate President Pro Tem Darrell Steinberg, D-Sacramento.
California has cut billions of dollars from K-12 and higher education because of an ongoing fiscal crisis and a steep drop in tax revenue.
"By any measure, whether it's the graduation rate, the dropout rate ... we must do much better by the children of California," Sen. Alex Padilla, D-Los Angeles, said in supporting the bills.
Assembly Speaker Karen Bass, D-Los Angeles, said she hoped California would be given special consideration for embracing reforms such as parental choice that go beyond the requirements called for by the Obama administration.