Payout from the endowment, Harvard’s greatest source of income, will see just a meager increase next fiscal year as the University continues to hold its schools to lean budgets even as its investment returns surge.

The payout will increase by 4 percent across the University, with additional modest upticks likely for high-priority programs. The decision, approved by the Corporation on Monday and announced to the deans yesterday, comes even as the endowment continues to rise at extraordinary levels, including a 21.1 percent return last fiscal year that put the fund at a record $22.6 billion.

“What I think is important, at a time when we have had some good fortune, is to make sure we allocate resources to our most important priorities,” University President Lawrence H. Summers said in an interview last night.

In what appeared to be an unprecedented arrangement, the Corporation, Harvard’s highest governing body, voted to allow an additional 4-percent increase in endowment payout for certain programs identified as priorities by top administrators. Summers said they were likely to include physical renovations, financial aid and new academic programs and research—areas he has long highlighted as top priorities—but he would not say how extensive the additional funding would be.

The University’s forthcoming expansion into Allston has weighed heavily on the central administration’s fiscal outlook, and recent meager payout increases seem part of a long-term strategy of maintaining the value of the endowment, which will be critical to funding major projects looming over the horizon—or in the case of Allston, over the river.

The 4-percent bump for fiscal year 2006 will mark the fourth straight year of slim payout increases that have generally fallen short of the higher-education inflation rate. Payout increases at the beginning of the decade were far higher, topping out at a 37-percent hike in 2002.

“There are undoubtedly particular people with particular projects who are focused on their particular budget and want more money to be paid out,” Summers said last month. “But my sense is that the academic leadership of the schools shares the same view that the Corporation has—that we need to set payout in a way that maximizes what we are able to do on a sustainable basis.”

Summers has repeatedly said the Allston expansion will cost “billions of dollars,” and in an interview last month he said budgets at individual schools need to take future endeavors into consideration.

Still, Summers said yesterday that slim payout increases in recent years should not be construed as a concerted effort to save for particular future projects.

BANKING ON THE BANK

The University has increasingly relied on payout to fund its annual budget. Ten years ago, endowment income accounted for just 21 percent of Harvard’s revenue, but by last fiscal year, that number had grown to 31 percent.

And at the Faculty of Arts and Sciences (FAS), where endowment payout now funds nearly half of the budget, the shift has been even more dramatic.

“Anytime a school is largely dependent on one source of income, it’s a concern,” Ann E. Berman, vice president for finance, said in an interview last month.

Still, as the endowment’s value has ballooned over the past decade—outpacing other sources of revenue, including tuition and federal research grants—the increasing reliance on payout has been seemingly inevitable. And with major capital projects on the horizon, the trend has little chance of abating.

Before the recent string of small bumps, the University issued a series of large payout increases—18 percent in fiscal year 1998, a drop to 6.5 percent in 1999, 20 percent in 2000, 11 percent in 2001 and 37 percent in 2002.

Summers said that after those large payouts, which coincided with weaker investment performance at the beginning of the decade, the endowment—adjusted for inflation—is only now returning to its previous levels.

“We make the payout decision far ahead of time, and we don’t have a crystal ball,” said Berman, who had yet to assume her position when those large increases were authorized. “Based on everything we knew at the time, it wasn’t a terrible decision.”

Still, she said the University would prefer to see more consistent increases over time.

“If you look at the history of our endowment payouts, we had a couple of years with very big payout increases,” Berman said, “and that disrupts budget planning, even from the deans’ perspective.”

Dean of the Faculty William C. Kirby concurred with that assessment in an interview before yesterday’s announcement.

“The Corporation has a responsibility to have over a period of years a range of payouts in which there are ideally not dramatic ups and downs,” Kirby said. He did not respond to a request for comment yesterday.

DIVIDING THE CASH

Setting the payout is an ongoing process for the central administration, and culminates with a final recommendation to the Corporation, which must approve the decision.

In 1998, the University solicited a study from the Harvard Management Company, which invests the endowment, to assess how payout should be determined.

Jack R. Meyer, the management company president, said the study placed considerable weight on the Higher Education Price Index. The index stood at 4.6 percent in fiscal year 2004, which ended June 30, 2004.

But both Berman and Meyer characterized the study as merely a guideline.

“It doesn’t take into account anything specific that’s happening within the University that you might want to consider when making a payout decision,” Berman said.

Last year, for example, the Corporation voted to up the payout increase to 4 percent after initially threatening a 0- and then 2-percent jump.

An unexpected rise in benefits costs necessitated the extra bump, Berman said.

PREPARING FOR ALLSTON

As planning for Allston begins to enter a more concrete stage this year, the University is preparing to pull in resources from a variety of sources.

The central administration has already begun taxing the endowment, at a rate of one-half of 1 percent per year, for an infrastructure fund which will finance land acquisition, construction and other costs associated with the expansion in Allston. The tax, begun in early 2001 and slated to last 25 years, should produce at least $3 billion in revenue—or potentially far more if the endowment continues its climb.

Gifts to the University are expected to provide further income, though administrators interviewed in the past month appeared to have differing views on how large a role Allston would play in the capital campaign that Harvard will launch in the next few years.

Berman said Allston was not “at the top” of priorities for the campaign, but Donella Rapier, vice president for alumni affairs and development, wrote in an e-mail that “Allston-related initiatives will be among our top priorities during the next campaign and well beyond.”

In the interview last month, Summers would say only, “It certainly seems that Allston will figure in the next campaign.”

The University, which boasts of an industry-leading AAA credit rating, could also assume considerable debt in financing its projects in Allston.

And in what Berman has described as a last resort, the University could consider decapitalizing the endowment, or withdrawing funds beyond the standard payout, to provide still further income for the expansion.

But Summers said last month that decapitalizing would not be necessary to pay for Allston.

“It would be wrong to say that that’s an option we’ve been looking for,” he said.

—Nicholas M. Ciarelli contributed to the reporting of this story.

—Staff writer Zachary M. Seward can be reached at seward@fas.harvard.edu.