City Atty. Jennifer McGrath said Huntington offered to reach a compromise with John McCarron, the attorney who represents the association, a grass-roots group that sued the city and the Orange County Local Agency Formation Commission, or LAFCO, in December.
McCarron declined to specify the proposal's terms last week, but said the city had made an offer that was "not acceptable."
He could not be reached for comment Monday.
Association President Jack Markovitz said he and others called the proposal "the April Fools' Day offer" because they heard about it shortly before April 1.
Sunset residents, he said, would stand little chance of getting a majority of Huntington voters on their side.
"When you do the math, we're less than half of 1% of the total votes in Huntington Beach," Markovitz said.
According to the Orange County Registrar of Voters, Huntington has 129,181 registered voters, compared with 830 in Sunset.
LAFCO put Sunset under Huntington's sphere of influence in July 2009 in an effort to rid the county of unincorporated islands. Last summer, the city applied for an "island annexation" of Sunset, which applies to communities smaller than 150 acres and removes their right to protest being annexed.
The city initially declared that because Sunset was being annexed as an island, its residents would not be forced to pay new taxes. In November, though, the city reexamined the laws and determined that it had to charge Sunset the same taxes as the rest of Huntington.
LAFCO approved the city's application Dec. 8, and the association sued the day after.
The lawsuit originally asked the court to direct LAFCO to reject the city's annexation application or require Huntington to hold an election to determine whether Sunset residents were willing to pay new taxes.
The opposing side, though, argued that the court did not have the power to influence legislative decisions. The association amended the language in its petition but has still asked the court to hold off on annexation until the case is resolved.
A hearing on the annexation is scheduled for 1:30 p.m. Aug. 8 in Orange County Superior Court.