private IList<City> _allCities = ...;

private IList<Department> _departments;
public IList<Department> Departments
{
    get { return _departments; }
}

private Department _selectedDepartment;
public Department SelectedDepartment
{
    get { return _selectedDepartment; }
    set
    {
        _selectedDepartment = value;
        OnPropertyChanged("SelectedDepartment");
        OnPropertyChanged("Cities");
    }
}

private IList<City> _cities;
public IList<City> Cities
{
    get
    {
        if (_selectedDepartment != null)
        {
            return _cities.Where(c => c.Department == _selectedDepartment).ToList();
        }
        return _allCities;
    }
}