This paper investigates the design of reduced-order functional observer for linear time-invariant systems (LTI) with time-varying delay. Firstly, the sufficient condition for the existence of reduced-order delay-free functional observers is obtained. Secondly, by solving generalized Sylvester matrix equations (GSEs), completely parameterized formulas of the coefficient matrices of reduced-order function observer are established. The free parameter matrices in the formulas provide the design degrees of the freedom and improve the convergence rate of the error system. Finally, two numerical and a practical examples are provided to illustrate the effectiveness of the proposed approach.