I have tried using this code in Firebug to see how it looks and it works there, however when I add it to the actual layout.css file and upload to the server, it loads all of the items except the background. I verified this by pulling up firebug and it does not show the background line and displays a blank background, however if I switch it to show me the source instead of the live view, the line is in the file.
If you're using Requirements::combine_files() on the live server, you also want to change the path to "../../mysite/images/headerclouds.jpg", which works with not combined_files() on the dev server too.
That was it. I can't believe I missed that. I actually retyped that line several times to try to fix any typos, but I guess after looking at it for so long, you read what is supposed to be there instead of what is actually there.