City gains a level when its population rise to shown limit (see top-left corner of city screen):

http://pix.academ.org/img/2010/08/23/7260650d81d148b7cc05c5ff2c41cb35.png

Mana is rized when you update Essence skill of your hero.

Your city should automatically level up when it meets the population requirements, might also need positive food/turn.

To achieve this you'll need to build a hut to increase your maximum population. You can only build this is you have food and it consumes food. So farm the fertile land first.

With the city selected, look in the bottom left. You should see a bar with a little house icon somewhere on it. That bar is the city level up meter, when it fills with population the city goes up a level. The house icon shows how many people your city can support right now. To move it up you need more houses (and to build more houses you need more food).

You get more food by building a farm on a fertile land tile (click the fertile land tile once your city influence covers it, and the option to build is there). Other buildings and research provide further food bonuses, as do caravans between cities.

Hope that helps.

you can not build huts with out food.. build city close to fertile land.. click on fertile land when city's are of influence or edge of city touch/encompass fertile land.. if you have enough materials and gold build farm.. when farm is done build first hut..

unless you are talking a city you took over from a minor race.. these can never go higher..

Honestly I think that you should be able to upgrade Wisdom upon level up (and maybe have it affect both Spells/turn and mana regen)

meanwhile, make spells much more reliable, and have Constitution, Wisdom, and Charisma all partially (1/5th?) feed into magic resistance.

and as for leadership skills, maybe Charisma could effect leadership (certainly morale)

   Thanks guys -Jeremy Sr.