34 C.F.R. § 361.11 – Withholding of funds.

(a) Basis for withholding. The Secretary may withhold or limit payments under section 111 or 603(a) of the Act, as provided by section 107(c) of the Act, if the Secretary determines that—
1. (1) The vocational rehabilitation services portion of the Unified or Combined State Plan, including the supported employment supplement, has been so changed that it no longer conforms with the requirements of this part or part 363; or
2. (2) In the administration of the vocational rehabilitation services portion of the Unified or Combined State Plan there is a failure to comply substantially with any provision of such plan or with an evaluation standard or performance indicator established under section 106 of the Act.
(b) Informal resolution. Prior to withholding or limiting payments in accordance with this section, the Secretary attempts to resolve disputed issues informally with State officials.
(c) Notice. If, after reasonable effort has been made to resolve the dispute, no resolution has been reached, the Secretary provides notice to the State agency of the intention to withhold or limit payments and of the opportunity for a hearing.
(d) Withholding hearing. If the State agency requests a hearing, the Secretary designates one or more individuals, either from the Department or elsewhere, not responsible for or connected with the administration of this program, to conduct a hearing in accordance with the provisions of 34 CFR part 81, subpart A.
(e) Initial decision. The hearing officer issues an initial decision in accordance with 34 CFR 81.41.
(f) Petition for review of an initial decision. The State agency may seek the Secretary's review of the initial decision in accordance with 34 CFR 81.42.
(g) Review by the Secretary. The Secretary reviews the initial decision in accordance with 34 CFR 81.43.
(h) Final decision of the Department. The final decision of the Department is made in accordance with 34 CFR 81.44.
(i) Judicial review. A State may appeal the Secretary's decision to withhold or limit payments by filing a petition for review with the United States Court of Appeals for the circuit in which the State is located, in accordance with section 107(d) of the Act.
(Authority: Sections 12(c), 101(b), and 107(c) and (d) of the Rehabilitation Act of 1973, as amended; 29 U.S.C. 709(c), 721(b) and 727(c) and (d))