It wasn't entirely a budgeting issue. The state-run institutions were essentially prisons for lunatics. The conditions were horrible and abuses were rampant.

It wasn't entirely a budgeting issue. The state-run institutions were essentially prisons for lunatics. The conditions were horrible and abuses were rampant. They were frequently sued for civil rights violations. So the institutions were shut down. The "patients/inmates" were then dumped on the streets. With no support, medication, or coping strategies, they inevitably moved into regular prisons, and are now "inmates/patients". They still experience many of the same conditions, but now they "deserve it", because they are criminals. US prisons are simply not set up for rehabilitation or treatment. There is no money to help you, but millions of dollars available to punish and contain you. The problem now, as it was then, is that the mentally ill were never in specialty hospitals to treat their specific needs. They were dropped into oubliettes, to be ignored and forgotten. If the institutions re-opened, it would be the same problem, because the same kinds of people would be running them and funding them.