I had a quick look; you really should consider reading the manual some time.
It should provide you with an answer to a lot of the issues you're looking at here.
Most importantly: when you enter a new layout, you're not entering a menu, and the menuIndex is reset to 0. When you exit a layout, you're not exiting a menu, and the previous menuIndex is restored.
Consequences: replace your onMenuEnter animations with onEnter animations, and onMenuExit animations with onExit animations. In addition, since I don't think you'll define more menu layers below this one, you can remove all menuIndex attributes.
Another point: when you use an image with src="images/selector.png", RetroFE will (in this case), first look for layouts/Old School Game Room/collections/Arcade/layout/images/selector.png, and if it cannot find it there it will look for layouts/Old School Game Room/images/selector.png. It will certainly not look in layouts/Old School Game Room/collections/Arcade/system_artwork/.
One last pointer: if you want Linux users to be able to use this layout as well, please remember that in Linux all file names and directory names are case sensitive.