We had an instance where a user deleted an admin and it seemed to delete the content that user had created. Is this currently how Craft works? If so is there a way around that without having to change every entry's author. Or suggestion adding a prompt to warn user of content being deleted and to just suspend them.
Currently, yes, that's how it works.
It's on our list to 1) Add a prompt warning what's about to happen and 2) Add options as to what you want to do with that author's current content (assign to a different user, delete, etc.).
As of Craft 2.3, when a user's account is deleted you'll be prompted what you want to do with their content.