Love this 
Especially the all around padding. The bg highlight to the right edge was indeed cutting some flow of energy 
That being said, could the scrollbar stay at the right edge? Right now it blends in left of the padding:
Agree about the space.. why not drop the button actually and use the same contextual switch as the admin menu or Documentation on meta?
With respect to the length of the sidebar in general, it seems it’s falling victim to it’s own success already? There’s just so much stuff to put there.. it often makes sense to have a custom section (or several), members can also put their own sections, then there’s the lists of categories, tags, messages, chat.. And you have that menu that doesn’t stop scrolling, no matter the screen estate.
Maybe just have contextual menus all over? To me they have a much nicer flow than collapsing sections.