SACRAMENTO, Calif. (AP) — In his first year in office, California Gov. Gavin Newsom had a $21.5 billion surplus to spend. In his second year, he had to make up a $54.3 billion shortfall.

But his third budget — which Newsom will reveal on Friday — could be his most challenging yet.

The coronavirus pandemic upended nearly every aspect of life in the state, yet it has had a uneven effect on the world's fifth-largest economy. Many people who earn more than $60,000 per year have been able to keep their jobs because they can work from home. But the employment rate for people who earn less than $27,000 per year — including restaurant and retail workers — has dropped nearly 27% since January, according to data from Opportunity Insights at Harvard University.

Since California's progressive tax structure relies mostly on wealthy earners, the pandemic has led to a strange contrast in the nation's most populous state: High unemployment coupled with strong state tax collections. The state has lost more than 1 million jobs compared with last year — the most in the country — yet it has collected $74.4 billion in taxes, or $13.7 billion more than it had anticipated.

The result is what the nonpartisan Legislative Analyst's Office calls a one-time “budget windfall.” The office says the windfall could be between $10 billion and $40 billion, although it says $26 billion is the most likely figure. That money can only be used once. It won't be available next year.

Newsom, together with state lawmakers, must figure out the best way to spend that money. The governor has already previewed some of his proposals. After Congress approved a $600 payment for adults, Newsom wants to give an additional $600 to Californians who earn $30,000 or less. If approved, that proposal would cost $2.4 billion.

Newsom also wants to spend more than $4 billion to, he says, create jobs and help small businesses. That includes $575 million for grants to small business owners, $100 million in tax credits to businesses that hire new workers, $353 million on workforce training and $70.6 million to waive fees for some businesses — including barbers, cosmetologists, manicurists, bars and restaurants.

And he wants to give schools $2 billion to help pay for testing, ventilation and personal protective equipment as he seeks a return to in-person instruction.

Newsom's proposal is just the first step in the budget process. Lawmakers must still vet his ideas and vote on them, a process that usually isn't completed until mid-June so the budget can take effect July 1. This year, Newsom is asking lawmakers to act earlier on some of his proposals, including the $600 stimulus payment and money for schools and small businesses grants.

Legislative leaders have pledged to act quickly, but it's unclear when that might happen. Lawmakers are scheduled to reconvene on Monday.

Public education will be a big issue after the state last year deferred more than $12 billion in spending for public schools. The deferral meant school districts had permission to spend the money, but the state would pay them back in future years. Many had to borrow or dip into their reserves to cover it.

“The first objective is to get out from underneath this record level of borrowing from schools,” said Kevin Gordon, a lobbyist who represents public school districts.

Health care spending, always an important part of the state's budget, will take on even more importance this year as hospitals are overwhelmed with virus patients and the state is struggling to quickly distribute limited quantities of a coronavirus vaccine. Newsom has already proposed $300 million for vaccines, including a “public education” campaign.

Last year, Newsom initially proposed health care cuts to cover the projected shortfall. Most of those cuts did not make it into the final budget. But Carmela Coyle, president and CEO of the California Hospital Association, said she will be watching closely for any proposed cuts this year.

“This should be a budget that leaves the health care delivery system, hospitals especially, untouched,” she said.