Charlie,
It's been a while since I flow timed one of these IPs, but I'll tell you what I remember. Let's hope that someone with more recent experience and/or a better memory chimes in.
I believe I had exactly the same experience as you did with needing to loosen the delivery valve holder (in addition to removing the delivery valve spring) to get the fuel to flow. I don't think that affects the results. Everything else you did sounds right, but I agree that the results seem questionable.
The nuts holding the IP to the block studs should be torqued to 15 to 16 ft-lb. Not real critical.
Things I can suggest that might have gone wrong include:
1. Is the shim stack between the IP and block the right thickness? The total thickness needed should be stamped by the block manufacturer on the block near the IP mounting. The shim(s) should stay with the block and be used with replacement IPs unless the camshaft is changed. Typical shim thickness is around 0.015 inches. Any error in shim thickness would translate directly into button thickness (or rather thinness). If I understand what you said above, you are measuring that you need about 0.018 inch thicker button, which would correspond to a shim stack that needs to be 0.018 inch thinner. The shim stack also controls the IP to cam gear lash, so it shouldn't be changed as a substitute for changing the button.
2. Are you sure you got the IP to cam gear mesh right? I don't know how a one-tooth error would translate into timing error, but I'd guess it would create about a 5-10 degree error. That may be about what you are seeing.
3. Are the marks on the flywheel you are using to measure the PC error about 0.2 inches apart? One of the manuals says to measure the PC error (the distance between the PC mark on the flywheel and the pointer) with a ruler, and that every 0.1 inch corresponds to 1 button number, or 0.003 inches button thickness.
Somehow, I think that the answer is right before us and that you are going to get this worked out with a simple adjustment. Let me know if I haven't confused you enough.
Regards,
Richard