Which Parties De-Institutionalized the Mentally Ill in California?
From a February 21 post by John Yoo, Noesis Noeseos wrote the following:
Reagan may have signed the bill partly because of libertarian and partly because of budgetary considerations, but the do-gooders of the day were screaming, don't incarcerate the innocent!
What I don't remember clearly but what I am willing to bet is that it was Jesse Unruh and the Democrat majorities in the state legislature that passed the bill onto his desk.
Answer by Ricipedian
Here's how it evolved:
Mental Health Study Act of 1955. Passed by Congress; signed by President Eisenhower. This created a commission whose 1961 recommendations led to the CMHA below.
Community Mental Health Act of 1963 (CMHA). Passed by Congress; signed by President Kennedy. Its ostensible purpose was to shift mental health care from big, centralized institutions to smaller local facilities. 
At about this same time, drugs became available that could help manage various mental illnesses, and this encouraged further deinstitutionalization. Also, a movie, Titicut Follies, was released in 1967 that showcased the Bedlam-like conditions at a Massachusetts institution for the criminally insane.
Lanterman-Petris-Short Act (party affiliations: R-D-D). Passed by the California Legislature, of which Jesse Unruh (D) was the Speaker, in 1967; signed by Gov. Reagan that same year. Took initial effect in 1969 and full effect in 1972. Narrowed the scope of what were considered to be confinable mental illnesses, established escalating judicial review requirements for various levels of involuntary detentions: 72 hours, 14 days, 30 days, 1 year, and indefinite. The net effect is to require that people are shown to be a threat to themselves or others before they can be institutionalized. 
Also in the mid-1960s, the ACLU started filing suit against hospitalizing people for indefinite periods of time, finding support among the judicial system.