Wow, there's a thread title I never thought I'd see on the DIS or anywhere for that matter.
I was born in Traverse City, MI. We moved out to CA. when I was young and that's where I grew up BUT we took many trips back and forth from CA. to MI. as our family was still there, and still is.
In 2004 I moved from CA. with my husband and kids and we lived in the Traverse City area for 3 years. Just moved to Vegas this summer.
So you can see why it caught my eye.
My Grandfather still lives in the TC area and worked at the hospital from approximately 1967 until about 1988. As you said the hospital closed in 1989, and they were already phasing things out and relocating patients so he took an early retirement.
When the hospital closed most of the patients were relocated with quite a few of them going to a hospital in Newberry, MI. but a few were just released into their own care.

Apparently according to my mom, alot of them lived in the swampy, wetlands area not far from the hospital near what is now a Meijer store.
My mom said she remembers after that happened she stopped wearing white socks for awhile because that's what all the released patients wore, folded down white socks, and she didn't want to be mistaken for one of them!
I'm sure my Grandfather has quite a few stories from his 20+ years working there. I should ask him. I'd hear bits and pieces of stories over the years but to be honest when I was younger I wasn't interested.
I do remember one about a patient who escaped and hung himself in the woods behind the hospital. And stories about the tunnels they used to transport the patients from one building to another. Very creepy indeed.
When we moved this summer they were still working on fixing them up so you could in fact live there if you wanted to. There is a restaurant called Stella's Trattoria or something like that.
http://www.stellatc.com/
We talked about eating there but have four kids who prefer Olive Garden, so we never did.
There are also offices, and I remember seeing a day care or pre-school of some sort. It will be interesting to see how it's transformed once it's all done.
My husband worked for those 3 years we all lived there, at Munson Medical Center which you probably saw since it's literally right next door. So he was always passing by the place.
We often wondered what stories that place holds, what things took place there over the years. I don't know, I'm not very intune with that sort of thing I guess because I never "felt" anything in all the times we were there. It just seemed like a neat old place with lots of history.
Huh, now that I've seen this thread and the pics it's made me think I should call my Grandpa tomorrow and see what stories he can remember about working there. Maybe I'll ask him to focus on any particularly haunting ones.
Thanks for sharing these and I do hope you enjoyed your time in TC. It's such a beautiful place to be, except in the winter, which is why we are now in Vegas.
ETA: If you do a Google search on Traverse City State Hospital you'll find tons of info and also do an Image search for more pics of the place.
Here's a website with some really cool pics:
http://photo.net/photodb/folder.tcl?folder_id=179614