Is this temp table behaviour documented?
This is because while executing the SQL function the entire function body is parsed and executed. But with the PLPGSQL function statement by statement is parsed and executed. Because of this reason the SQL function not able to see the temp table which is created during the function execution.


In other words this applies to other objects, not just temp tables. This is easily demonstrated too:

begin;
--
create function pg_temp.f() returns integer language sql as $$select 1;$$;
create function g() returns integer language sql as $g$
  create or replace function pg_temp.f() returns integer language sql as $$select 2;$$;
  select pg_temp.f();
$g$;
--
select g();
/*
 g
---
 1
*/
select g();
/*
 g
---
 2
 */
--
rollback;


or even:

begin;
create schema stack;
set search_path to stack;
create temp table foo(id) on commit drop as values (1);
select * from foo;
/*
 id
----
  1
*/
savepoint s;
create function f() returns setof integer language sql set search_path = stack, pg_temp as $$
  create table foo(id) as values (2);
  select id from foo;
$$;
select * from f();
/*
 f
---
 1
*/
rollback to s;
create function f() returns setof integer language plpgsql set search_path = stack, pg_temp as $$
begin
  create table foo(id) as values (2);
  return query select id from foo;
end;
$$;
select * from f();
/*
 f
---
 2
*/
rollback;


The suggestion on pgsql-bugs is that the documentation is amended to make this behaviour explicit.



edit:

A change to the documentation has apparently been comitted but isn't yet showing in the 9.4 docs