I had the same issue. The small copper wire that enters from the back of the signal broke off. It just needed reconnected. The advice about the powered graphite is right on as it will help the drum turn better.
Just making sure you know this, but this signal requires AC for the arm to swing. If you're using a DC power pack (like the ones for HO sized trains), this signal won't work.
If you have an ohm meter, you could remove the light bulb and check the resistance between the two terminals under the signal. If it's anything other than open (or infinity), the coil is not likely bad. If it does read open, the coil is bad.
I'll go along with reaming the hole in the spool of the coil. If that makes the arm move, but sluggishly, I would try to contact a parts dealer and buy a new drive washer.