I go by the level of the books DD can pick off the shelf in the library and read cold. She needs to be able to enjoy them, read fluently (at least 60 wpm without stumbling) and understand plot subtleties. She may be able to read books at about a grade level higher, but the level at which the above is a "sure thing" is surprisingly consistent.
I have been using Fountas and Pinnel (GRL) ever since we found out that is the leveling system used by all three schools we have applied to. We were told that the grade level equivalents (for instructional level) were recently changed to the following in a handout:
Kindergarden:
A
B
C --Brown Bear, Brown Bear, What Do You see?
D
First Grade:
E--Go Dog Go, Morris The Moose
F
G
H--A Kiss for Little Bear
I--Hi, Fly Guy
J--Henry and Mudge, Fire Cat
Second Grade:
K--Tales of Oliver Pig, Mercy Watson to the Rescue
L--Judy Moody (Book 1)
M--Magic Treehouse, Freckle Juice, Flat Stanley (Book 1)
Third Grade:
N--Catwings
O--The Boxcar Children, Ramona the Brave
P--The Fantastic Mr. Fox
I believe that Kindergarten used to go up to C etc. So, apparently expectation are indeed rising in schools. Also, sometimes there are large differences between Lexile, DRA, and GRL. And, the scholastic grade level equivalent frequently seems to be too high.