Before we get to the City of God/city of man distinction as it applies to mankind, we have to say a word or two about how it can be the case that men and angels can be lumped into the same cities. That is, why are there only two, and not four?
We have to start with the understanding that there are two sorts of dispositions in rational created beings--good and evil. This is not something that is originally intrinsic to our natures (however much it may be "natural" now), but is a result of our choice and inclination:
There is no reason to doubt that the contrary dispositions which have developed among these good and bad angels are due, not to different natures and origins, for God the Author and Creator of all substances has created them both, but to the dissimilar choices and desires of these angels themselves. Some, remaining faithful to God, the common good of all, have lived in the enjoyment of His eternity, truth, and love, while others, preferring the enjoyment of their own power, as though they were their own good, departed from the higher good and common blessedness for all and turned to goods of their own choosing.This choosing of the lesser good (themselves, "good" as created beings) becomes the root of all sin and makes those who prefer the lesser good to the greater Good that is God "proud, deceitful, and envious."
Likewise, the unfallen angels continue to enjoy happiness as a result of their unbroken union with God. This is the source of happiness for angels and for man (but not for animals, which can never be "happy" in this sense), and the reason that the fallen angels have no happiness--because they have betrayed even the goodness of their own natures by rejecting the union with God which they were made for.
Thus, we see that God did not make some angels good and others evil--they are the same sorts of creatures who have chosen different things. The good angels have chosen to live according to the order of existence God has established, and consequently to live in accord with their own natures as originally created. The evil angels, on the other hand, have usurped this order and embraced instead the alternative to God. Of course, since God is the supreme Good, there can be no true alternative to Him, and as a result they have chosen evil, which is a lack of goodness.
What Augustine has done here is to protect God from the charge that He creates evil. Augustine has of course already said that God is sovereign over it and that He can use evil to His own ends, but at no point is He morally culpable for its existence or its effects on His good creation. When we choose to betray the good He put in us when He made us and embrace instead of His Goodness and the orders He established, we make a ruin of our own souls and replace our chance at happiness with the vacuous nothingness of rebellious evil. We gain no good thing from our choice, but instead lose the life that we were made for by our Creator.