I'm going to go against the grain. It's not like you're failing or seriously holding back a kid. He's just going to learn that his behavior has consequences, for something that is fun but not necessary. Anyone who is saying that that is a bad thing is stupid.
I get that they think 1st grade is too young. But I have a brother who through his whole life has received similar types of leniency. I 100% guarantee that it has never been good for him as a person. He's barely made it through high school, and has only done so by exploiting the portion of his classes that will work with his poor work ethic. I know a full 75% plus of his class work has been put it after a deadline, but he has been allowed to progress in school. He will struggle as a person though.