I am wondering if an across the board cost of living raise can be withheld for a performance issue. I am a middle manager and we were just informed that our cost of living raise would be withheld if we do not complete performance evaluations on time - is this legal , is it only merit raises that can be withheld?

Unless there is some employment contract in place guaranteeing a cost of living increase, then yes, it can be withheld. Employers aren't obligated to give a cost of living increase - or even merit increases - in the first place. Sounds like your employer has decided to play hardball on supervisors getting their performance appraisals completed timely, which is a chronic problem for many companies.