The paginate decorator works fine with tg.strict_parameters = True as set in the default dev.cfg, but this is not the default and not set in the sample prod.cfg. In this case, if tg.strict_parameters = False, then paginate works only for methods having the paginate parameters explicitly declared or catching additional parameters with **kwargs. The reason is that if you set tg.strict_parameters = False, then all additional parameters are thrown away by TurboGears with adapt_call(), including the paginate parameters, so paginate never sees them.
Something should be done about this, since it's pretty confusing when paginate suddenly stops working in production.
See also this thread on the turbogears mailing list.