It would appear you're on the right track then, and that yes, perhaps the rod inside the unit is not moving when the lever is activated. I've heard the spring that fits over that rod can break. If it does, that could be the issue. This means, trans has to come apart to fix it. I've actually removed just the case/cover from the OD section, while leaving the trans installed, and worked on them. Just get a new gasket set. It would take you about an hour and half to check it. Drain the trans, disconnect the drive shaft and the remove the OD cover/housing. Only tricky part is removing the OD control lever on the trans - it involves driving a pin out so you need a long, stiff punch. With a proper punch, it's actually pretty easy. The shop manual provides good instructions. I have a lot of photos from when I did it so let me know if you want me to post some.
