Well this:
I really think that she should be encouraged to continue reading and if they want to give her credit 'like AR' she should be asked to write a report or given an oral test. Instead, they want to deduct from her ELA grade for not making her required points.
and this:
I have offered to purchase the tests for the school but the response was not favorable.
say to me that "the way things are" or the AR system (which = "bureaucracy" in terms of the school) is more important than what is good for your child. They want her to fit into the system, even though she's beyond the system's capacity to teach her.

The notion of penalizing her grade really steams me. Well, school system, then give her books that both interest her and meet the AR criteria. Can't do that? Then the system doesn't work for her and they need to find another solution, such as the ones you've recommended.
I think I'd be fighting pretty hard on this one if I were in your shoes. My injustice meter is off the charts! I feel like they're losing sight of the forest for the trees here. They've got a good reader who likes to read, and they're going to work hard to shut that down because they don't have and won't get the resources that she needs, but they also won't adapt the system in simple ways to meet her needs. That's the very definition of bureaucratic insanity to me!
Sorry, you're dealing with a former English teacher, here. This is the kind of stuff that made me crazy when students finally got to me in college. The things some of their schools had done to them to kill the love of literature and writing...
