Governors - Corporate scandals shake Main Street, Wall Street

BOISE, Idaho -- West Virginia was among a handful of states that weathered a stormy economy to end the last fiscal year in the black. This year that surplus is gone, thanks largely to a plummeting stock market that has decreased investment returns.

Now state leaders are worried about the pension fund that serves teachers, judges and troopers. And like any individual whose 401(k) has hit the skids, they are looking for someone to blame.

"You have a package that you've been investing in, it declines. The question in many peoples' minds is how much of that is attributed to some of the corporate irregularities that have been reported -- the Enrons of the world," said West Virginia Gov. Bob Wise.

"It has impacts far greater than simply: Their stock is down. There's a ripple-through effect that takes awhile for everyone to appreciate."

Chief executives at the National Governors Association meeting this week in Boise said the corporate scandals shaking Wall Street also have hit Main Street USA -- from plunging revenue that are prompting program cuts to declines in pension funds and layoffs.

"The greatest anxiety, the greatest fear, the greatest frustration we see on peoples' faces is when they get pink slips," said Mississippi Gov. Ronnie Musgrove, whose state is home to embattled corporate giant WorldCom.

The Clinton, Miss.-based telecommunications company is on the verge of bankruptcy after disclosing it disguised $3.9 billion of expenses as capital expenditures to appear more profitable. Last month, WorldCom began laying off 17,000 workers, and more job cuts are expected.

At the state level, where governors are grappling with billions in budget shortfalls, the same corporate crises that have sent the stock market reeling are hindering an already desperate economic situation.

Tax refunds on the rise

Tax refunds are rising while revenue are falling because of the market instability. Investors are subject to capital gains taxes when they sell a stock that has risen in value. But if the stock declines, losses can be used to reduce their taxes or even get a refund.

A recent nationwide survey found the number of state refunds was up 6.4 percent and the average individual refund was up 8.9 percent, further draining state coffers.

State retirement funds also have taken a hit.

In Michigan, where the pension fund is worth about $45 billion, officials reported an unrealized loss of $116 million on WorldCom.

"That's a big deal," said Michigan Gov. John Engler, the Republican chairman of the governors group. "We're like an individual investor. We want good information, we want it to be honest. ... If somebody's in trouble, we need to know it."

West Virginia faces a $150 million budget shortfall, in part because it must pour more money into its pension fund to make up for recent losses.

Where once the fund saw returns of 6-10 percent, investments grew at just 1.2 percent last year -- forcing the state to transfer $275 million into accounts.

"This year we know we've lost 1-2 percent, and we are starting to see each month the returns come in with an increasing number," Wise said.

Retirement system review

Virginia Gov. Mark Warner ordered his state's retirement board to study whether it should take a more active role in scrutinizing the companies in which it invests.

The move came after the Virginia Retirement System lost $108 million in the WorldCom scandal and $60 million when the energy firm Enron went bankrupt.

About 1,300 WorldCom workers in Virginia were among those laid off, and now Warner worries about trying to lure new business to his state when consumer confidence in corporate America is waning.