Default settings that are set by the admin for the User report do not seem to work properly.

Basically, go to Site Administration > Grades > User Report and set "Show Hidden Items" to "All Hidden"
Go to any gradebook > Settings > "Show Hidden Items" lists "Hidden Until" as a default

As an admin set it to "No Hidden"
Gradebook settings will list "Hide" as a default

As an admin set "Only hidden until"
Gradebook settings will list "Only hidden until" (ok)