i think it may be because the way paint effects works at rendering, it has some screwing with alpha, it thinks its not vissible even if the other geometry is transparent... wich leads to interesting times...

oh! and my favorite on the list of "things that should work and be pretty easy"... try to render a paint fx tree with lightfog coming from the rear...

the way to solve your problem would be converting the painteffect to polygons... some of ´em convert smoothly (most not tough...)... and dont cover a big spot with grass it converts to LOTS of polys...