By Karen Pierog

Dec 6 (Reuters) - Michigan officials will likely launch a review of Detroit's dire fiscal situation next week that could lead to a determination the city needs an emergency manager to oversee its finances, a state treasury spokesman said on Thursday.

Ongoing fiscal distress and political turmoil that has derailed reform measures in Detroit have heightened concerns by state officials about the city's long-term viability.

"No one seems pleased with the pace of reforms that have occurred," said Terry Stanton, a spokesman for Michigan Treasurer Andy Dillon, confirming the review was likely to start next week.

The appointment of an emergency manager to oversee the city's finances would bring Detroit a step closer to a possible municipal bankruptcy filing because a manager is a prerequisite for that move under a current state law. However, that law, which took the place of a stronger 2011 emergency manager law that Michigan voters repealed on Nov. 6, also gives the state the opportunity to block the path to bankruptcy court.

Meanwhile, a new emergency manager bill that includes a bankruptcy option for local governments and that has the backing of Governor Rick Snyder's administration surfaced in the Republican-controlled House this week.

A Chapter 9 filing would make Detroit the United States' biggest municipal bankruptcy in terms of population, according to James Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler.

The city with its $8.2 billion of outstanding debt would also eclipse Alabama's Jefferson County, which filed the biggest muni bankruptcy ever in November 2011 with $4.32 billion of debt.

Detroit, a city of 700,000, has been hard hit by a steep population drop, years of severe budget deficits and escalating employee costs, factors that led state officials to begin an intervention process a year ago.

Stanton said if a serious financial problem is uncovered by a preliminary 30-day review, the governor would appoint a review team, which would have 60 days to determine if an emergency financial manager is needed. If that determination is made, the governor would ask the state's Emergency Loan Board to appoint a manager.

The new legislation, which is winding its way through the House, would keep intact any ongoing review process, existing consent agreement and appointed manager.

However, it would give the elected officials of local governments determined to be in a fiscal emergency the option to chose between filing for bankruptcy, having an emergency manager, arbitration with a neutral party or entering into a consent agreement.

Detroit, Michigan's largest city, avoided the appointment of an emergency manager earlier this year by signing onto a consent agreement that created an oversight board and other measures aimed at bolstering the city's sagging finances.

Detroit is projecting it will run out of cash this month unless it receives $30 million of bond proceeds. The state has tied the release of that money to certain conditions, including the hiring of law firm Miller Canfield to work on issues involving a consent agreement between Detroit and the state.

But the city council last month rejected a contract with the law firm.

The city council and the unions have been at odds over some of the changes Mayor Dave Bing, state officials and the oversight board believe are needed to get Detroit's finances on better footing. The city's path to a fiscal restructuring is further clouded by ongoing litigation over the state's move to resurrect the former emergency manager law in place of the repealed 2011 law, although the passage of a new law could end that battle. 

(Additional reporting by Michael Connor)

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