then we were in kids town playing and there were some bikes and stuff. Hannah ended up smacking her knee on something and was crying and the teachers response was "Oh stop it. you're fine. go sit down"
I would talk to the director about it again, include the fact that you're wondering if she's retaliating. And if it doesn't get any better, I would say talk to the lady yourself. Tell her it's unacceptable how she's talking to the children, and you won't let her continue to bully kids in front of you. Maybe it will result in her getting upset because you're "undermining" her, and maybe you'll lose your job over it, but I think you'll feel a lot better if you stick up for the kids.
Working with kids is tough as hell. Maybe she's burned out, but that doesn't make it okay. That means she needs to find another job.