In this paper we formulate and solve a problem encountered in engineering applications when a linear-quadratic (LQ) optimal feedback controller uses state estimates obtained via a reduced-order observer. Due to the use of state estimates instead of the actual state variables, the optimal quadratic performance is degraded in a pretty complex manner. In the paper, we show how to find the exact formula for the optimal performance degradation (optimal performance loss) in linear time invariant systems for the steady state case (infinite horizon optimization problem). The optimal performance loss is obtained in terms of solution of a reduced-order algebraic Lyapunov equation whose dimension is equal to the dimension of the reduced-order observer. The quantities that impact the performance criterion loss are identified. Practical examples (an inverted pendulum on a cart and an aircraft) show that the optimal performance loss can be very significant in some applications, and even very high in the presented linear-quadratic optimal control of an inverted pendulum problem. We have shown, using the derived formula, how the optimal performance loss can be considerably reduced by properly choosing the reduced-order observer initial conditions via the least square method.