The turmoil on Wall Street is setting off warning bells in state capitols, reports The immediate casualty is the loss of millions of dollars in the value of states’ pension funds and other investments, but a bigger fear of state officials is a prolonged financial crisis that further reduces already shrinking tax revenue. And that, in turn, could further ravage local school budgets. Most states diversify their portfolios, which helps cushion the collapse of the investment bank Lehman Brothers Holdings and the federal takeover of giant insurer AIG. Of greater long-term concern to state officials, they say, is how events on Wall Street are tightening credit, threatening to slow down business and consumer spending. If that continues, state tax revenues could plunge further at a time when more than half of states already are having trouble making ends meet because of the mortgage meltdown that began last year. Because every state but Vermont is constitutionally required to balance its budget, they have little maneuvering room. So at least 29 states have instituted some combination of spending cuts, hiring freezes, tax increases, and borrowing to cover shortfalls. “The impact on tax revenue is likely to be significant and damaging,” said Robert Ward, deputy director of the Rockefeller Institute of Government…

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