The major function of the Kensico Reservoir is to receive water from all six Catskill and Delaware system reservoirs, and to make those waters available for the fluctuating daily demands of New York City water users. Ordinarily, Kensico is the last stop for all Catskill and Delaware system waters before those waters enter two aqueducts and flow into the much smaller Hillview Reservoir in Yonkers (just north of the City line) for distribution throughout New York City. As such, it is called a terminal, rather than a collecting, reservoir. Under normal operations, waters from the Catskill system's Ashokan Reservoir and the Delaware system's Rondout Reservoir travel through the Catskill and Delaware aqueducts and under the Hudson River to the Kensico Reservoir. (Delaware water usually passes through the West Branch Reservoir before reaching Kensico.) Kensico also has its own watershed, which supplies just 2% or less of the total water volume entering the reservoir. As the final reservoir in the Catskill/Delaware system before water enters the distribution network, the Kensico is subject to federal water quality standards for coliforms and turbidity.

The Kensico watershed's drainage basin is 13 square miles and includes portions of the Towns of Harrison, Mount Pleasant, North Castle and a small part of Fairfield County, Connecticut.