Teachers: What should be done about high school kids who read, write, and spell on elementary school levels?

There was a teacher who was currently dismissed for questioning the school system. She taught 12th grade and was astounded as to how many were borderline "illiterate"; a great deal of her students didn't know their parts of speech, and weren't able to read the required material (12th grade literature). Over 70% of her class could not prolifically write an essay, and had very low vocabulary, the simplest words (that odds are a 6th grader would know) would be referred to by her class as "big words". She took her complaints to the school head, who showed her the students' standardized test scores which revealed the reading levels of her students, most of which didn't exceed the 3rd or 4th grade. She asked how is it that these students make it to the 12th grade or high school general without the basic skills. According to her, his response was said to have been something along the lines of, "most of them would probably never get out of school" and suggested that she adjust her curriculum to accommodate her students. When she asked about the very few who were on grade level, he said it wouldn't be fair to give them higher level work as it might offend her other students. She lowers her standards as much as she could, and students were still complaining; she assigned a 7th grade worksheet and one her seniors said (forgive my use of the "N" word, this is what was said) "This is too damn much you teachers make a ni**a wanna drop out". She speaks to some of the parents and the parents gave her an attitude and said if their son/daughter couldn't read, write, etc it was the teachers fault, and their children don't belong in any sort of special education program. Should parental responsibility not play a role in a child's education to some extent? Long story short, MANY parents started to complain about her antics to get their kids up to grade level, and claimed she was just setting them up for failure, and the board felt the same, so she was let go. This is really upsetting, here was a teacher who didn't want feel that a system should graduate students who can't read, write, spell, or do basic math, not because she was being difficult, but because she cared, and wanted them to be able to function in the world. In this same school system, there were teachers pressured to pass students who didn't show up for over half the school year. Don't you think that just passing a student along is a disservice to them? Don't you think this will affect them harshly when they're out in the real world? What should be done about this system? One teacher suggested, "if a child works at a 4th grade level he/she should be in the 4th grade" I don't think that would be too good (not sure if she was serious). However, I would really like to hear opinions about this, especially from teachers (if possible). Thanks to anyone who responds!