By Jim Christie

SAN FRANCISCO, Oct 17 (Reuters) - California lawmakers in their next session will discuss small steps the state can take to help local governments avert bankruptcy, focusing on the use of controversial capital appreciation bonds, State Treasurer Bill Lockyer said on Wednesday.

Lockyer said he expects state officials to discuss developing an early warning system to help local governments understand the extent of their financial troubles.

Three California cities filed for Chapter 9 bankruptcy protection from their creditors this year, raising concerns in the $3.7 trillion U.S. municipal debt market that other cities in the most populous U.S. state could file for bankruptcy.

State officials could also extend to financially distressed local governments' advice on addressing their problems, Lockyer said at a conference hosted by the Bond Buyer and the California Debt and Investment Advisory Commission.

Lockyer said he expects groups representing local governments would oppose aggressive intervention ideas, which he said state leaders are unlikely to press in any case as they do not want the state to pick up the tab for bad financial decisions made by local governments.

The treasurer also said the use and structure of capital appreciation bonds will likely come under increasing scrutiny.

The bonds, whose payments are deferred while interest compounds, have become an issue in recent months after it came to light that a San Diego-area school district will pay nearly $1 billion for a $105 million loan.

Lockyer has been looking into other capital appreciation bond deals by school districts and said the use of the debt needs to be reined in.

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