Harvard spent $1.6 billion from its endowment to support University operations this year, an increase of nearly 25 percent over the previous years. Nevertheless, unprecedented growth in the size of the endowment meant that the University still spent less than five percent of its accumulated wealth, the number that Harvard claims is its goal.

Payout rates have become a hotly debated issue in higher education in the last year as Senator Charles E. Grassley, the ranking member of the Senate Finance Committee, began attacking what he saw as “hoarding” among schools with large and fast-growing endowments.

Grassley, an Iowa Republican, floated the possibility of mandating a minimum five-percent payout rate for higher education endowments, similar to the current standards for foundations and other charities that receive tax-exemptions.

Harvard sets five percent as its payout goal, but it has exceeded that mark only once in the past 10 years. This is in large part due to consistently high investment returns, as the five percent target is based on a projected endowment growth rate of eight percent, which the last decade of returns has proven to be a conservative projection.

Last year, governmental pressure led top Harvard officials to encourage deans to come up with programs to up spending through the use of strategic payouts and decapitalizations by which schools can receive additional money from the president and the Harvard Corporation, which is responsible for setting the University’s budget.

“One of the things we’ve asked them to do is to up the spending rate and try to identify priorities,” University President Drew G. Faust said last spring. “So what we’ve been talking about is really the use of the strategic payout.”

Harvard’s $36.9 billion endowment is the largest in higher education, though it trails Princeton’s $16 billion endowment on a per-capita basis.

Under increasing scrutiny, Harvard and other wealthy universities have defended their sub-five percent payout rates as necessary to build a cushion against periods of financial downturn.

Several of Harvard’s schools are heavily dependent on endowment money to fund their operating budgets. While some Harvard schools, like the School of Public Health, draw most operating revenue through grants and tuition, others, such as the Faculties of Arts and Sciences and the Divinity School rely heavily on endowment income. Those two schools drew 46 and 66 percent of their operating expenditures, respectively, from their endowments as of 2006.

Harvard has emphasized that its endowment growth has been used to increase financial aid, one of Grassley’s oft-cited goals in criticizing low endowment spending rates. For example, the press release accompanying Harvard’s investment returns today mentions “financial aid” six times in its first five paragraphs.

Grassley has recently toned down his legislative threats as schools have posted lower returns amidst a market downturn.

Earlier this week, Grassley spokeswoman Jill Gerber said endowment performance in tough market conditions would be a key factor in determining whether the senator would push legislation to mandate a five-percent rate.

Harvard’s healthy 8.6 percent gain, while significantly lower than in recent years, left the endowment larger than last year in real terms, even after the record payout.

—Staff writer Clifford M. Marks can be reached at cmarks@fas.harvard.edu.

—Staff writer Nathan C. Strauss can be reached at strauss@fas.harvard.edu