Since creating a distro is mostly about packaging software, I assume they use their distro daily to make sure software doesn't break.

Anecdotally, I've seen Ubuntu and Fedora maintainers publishing screenshots where you clearly see that they use the distro they work on.

I think that's almost the only option. The distro is everything on top of the kernel, so to make everything work in tune they will need to be in. Specially Arch IMHO, because they usually post on the community page when some manual intervention will be necessary.

I imagine there is both scenarios happening.

Take for example, Apple. They have Mac /MacOS but for a long while ( I can't confirm currently ) they were using Windows PCs to design their products--even though their CAD software they used had a Mac version.

Often to a fault. Sometimes building the packages that make up the distro requires software that is only available and packaged for that distro.

the distro's tooling usually works best in that distro. not really linux but it seemed like many BSD devs use a different OS on their dev workstation tho.

Most often, yes. But there are exceptions. A lot of Ubuntu developers were on Debian in the early days for example. I imagine some still are - there's a bit of overlap between Debian & Ubuntu developers here and there.

I maintained packages in various BSDs pkgsrc/ports tree, even though I never daily drove any of them, and had them in a virtual machine at best.

Unfortunately I don't have a source, but I remember reading that some Debian packagers prefer using Arch, because doing the packaging there was easier for some reason 😅