727 not shifting right

Was the stock valve body known to be good? If unknown it's possible the 1-2 shift valve is stuck in the valve body. A governor pressure test such as suggested will reveal if it's a gov or VB problem. If the gov pressure drops to less than 2 psi it should start out in 1st gear. If it drops but still starts in 2nd I'd look at the 1-2 shift valve in the VB

I wasn't too sure about the 1-2 valve so I didn't mention it, but to the OP the valve bodies have to be really clean.
Flushing, blowing out and moving the valves in their bores type clean.
The only thing I could think of was the valve in the VB could be stuck in the second gear position. (which I have personally never seen happen before.)
And I couldn't imagine it getting put on that bad of condition.

One other thing and can think of is that it's possible the VB was over tightened causing the valve to get jammed.