Transparency in tiled backgrounds

I'm trying to make an underwater scene with layer 0 a tiled background for the sky and layer 1 a tiled background for the water.

However, transparency does not seem to be working on layer 1 so I don't see the sky above the water line, just the color white.

Is there a setting I need to make transparency work or do I need to use sprites for the water?

Transparency should work fine with tiled backgrounds, there's no setting for it.

Check the transparency settings on the layers themselves as well...