Historically, the financial responsibility for caring for those with mental illness has shifted back and forth from the local community, to the state, to the federal government. Today states provide the vast majority of the funds to the state mental health agencies and oversee local governments and most private resources for mental health funding. To establish financially sound and responsive mental health systems, state legislatures should: (1) develop effective fiscal/management models; (2) oversee the coordination of services and provide the legal framework for service delivery; (3) examine costs involved in providing care for those with mental illness; (4) use an improved system of contract management, budgeting, and information management; (5) remove specific eligibility requirements and encourage states and localities to meet the needs of the mentally ill; (6) encourage private insurance programs to provide financial incentives for the provision of care in the least restrictive, least costly environments; and (7) encourage creative and efficient models for improving mental health financing. Financing trends could produce significant change in the future reimbursement of mental health care with states being challenged to create a funding mix for mental health and supportive services and to develop cost-effective program implementation. (Specific program and legislative responses of the states are described.) (ABL)