A governmental DB Plan states that if the employee has less than 15 years of Credited Service a loan is taxable notwithstanding the fact that repayment is made monthly over 5 years. Is such a plan rule permitted? Please elaborate.

The provision doesn't make sense. Either it is a loan or a distribution. The determination of whether or not a loan is taxable is made in accordance with IRC Section 72(p), not in the plan documents.

An in-service loan from a Governmental DB Plan is deemed to be a taxable event. Is it appropriate to require the employee to pay off the loan?

Whether it is taxable is a separate issue from whether it must be paid off. The parties can agree that the loan will be paid back so that the employee will not have retirement benefits reduced and part of the payments will be after tax because the loan is regarded as basis. Also why is the employee required to treat the loan as a non taxable event? After all a taxpayer is not required to take a deduction of mortgage interest or property tax deductions.