It's originally a 360 block, now bored & stroked. Current distributor is an MSD but we believe the damage was done prior to all of this. Suspect the block was probably bad in the beginning and the machine shop missed this - kind of hard to reconstruct. Everyone wants to blame the other guy.
As far as gear mesh, helical gears don't like mismatch, and .050" on this small a diameter gear is really a big deal. Imagine the ring and pinion being mismatched by the same amount. It would howl like a banshee.
The hole is not bushed, that is just the way it appears in the photo. Everyone would like to be able to fix it 'in place', but to do it properly, it probably is going to involve pulling and tearing down the motor.
Open to any othe ideas, thanks for those that have been offered.