I think there were three primary reasons for closing inpatient mental facilities.

• The medical field's belief in modern treatments, specifically anti-psychotics. There was a lot of optimism that drugs and out patient setting could manage mental illness better than inpatient settings

• Abuse in the inpatient setting, the above combined with stories of the abuse of mental patients including reporters going undercover as patients shocked society.

• Cost, which you mention. The belief that patients could be better treated in the outpatient setting, combined with the the fear of abuse and the immense cost savings that could be realized result in a a nationwide movement to transition the mentally ill out of inpatient wards.

It's worth mentioning that while funding was cut in CA under Reagan, it was done with a majority democratic assembly and senate. The truth is this was a popular initiative with wide scale support. People believed that they were providing a better opportunity for these incarcerated and ill people. Unfortunate they were overly optimistic about the ability to manage mental illness in an outpatient setting and once the money was gone, it was never coming back.