I spent 2 hours with Apple Support's chat, the last hour with an expert. Neither the regular support person nor the expert could get this to work. I rebooted both. Unpaired and paired. Put on charger and removed from charger. It worked fine the first time BEFORE I upgraded my iPhone to iOS 8.4.
I created a test playlist with 1 song in it. And yes, the song is on my phone and not the cloud. Now a single 5.6 MB song took over an hour to sync. Well, I have 143 songs. That will be about 6 days of the phone and watch on their chargers and not on me. That's not going to happen.
My guess is that iOS 8.4 somehow screwed this up. I guess I'll have to wait for Apple to fix this "feature". Total fail.